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MtGox is known for abusing the market and cancelling trades when the price falls significantly. It happened before [1]. One way to look at it is that they prev

MtGox is known for abusing the market and cancelling trades when the price falls significantly. It happened before [1]. One way to look at it is that they prevent a bank run. The other perspective is that they trick people into thinking the market price is higher than it really is, making unaware people lose even more money as they buy at the high price and the crash happens anyway, just over a longer time. [1] http://www.malwaretech.com/2013/11/mtgox-nearly-breaks-bitcoinagain.html http://www.malwaretech.com/2013/11/mtgox-nearly-breaks-bitco...

TwoBit 13y ago
I also can't help but wonder if insiders of sites like MtGox are taking advantage of their market knowledge.
- n00b101 13y ago
  This issue goes well beyond "market knowledge." MtGox _is_ the market; they control the order book, trade matching engine, data feeds and even the custodian accounting system. If you own your very own completely unregulated trading exchange and deposit syatem then you have a big incentive to cheat the market. One way to do so would be to allow your own trades to jump the queue in the order book. By ensuring that your order are always filled ahead of everyone else's (even when you place them later in time) you would have a massive advantage if you start doing market making trades. Another dimension is that MtGox plays not only the role of an exchange but also the role of a custodian for US dollar accounts. MtGox's systems decide how many USD a particular trading account has for buying Bitcoin. This incentivises them to create US dollars "out of thin air" for their own trading account and then use those fictional US dollars to buy Bitcoin from MtGox customers. Combining these two advantages (money "creation" power and total market book control), they could extract huge sums of money from customers through trading without even having to invest a single dollar from the "real world." And if this market making strategy were to go wrong and MtGox loses too much fictional USD currency they could simply reverse the trades! Worst case scenario, if they lost too much money, they could just disappear without paying out customer USD balances. This is why real financial exchanges are heavily regulated and the different roles are played by different legal entities (eg exchange role vs custodian role).
  - Anderkent 13y ago
    > Worst case scenario, if they lost too much money, they could just disappear without paying out customer USD balances. So you risk your (incredibly profitable) business just to skim a little on the spread? Doesn't seem worth it.
    - rbobby 13y ago
      Might not be the owner... could be a worker doing it.
    - nullc 13y ago
      And misconduct like that results in clear evidence which none of the people who claim to "know" can produce. A lot of people who just do not understand how thing kind of market works make these allegations— due to things like issuing a market order and then having the trade execute at prices which are dissimilar to the last price but completely explained by the published orderbook.
    - sliverstorm 13y ago
      Ah, but what's the margins? How do they compare to what they can skim?
  - hft_throwaway 13y ago
    There's a good reddit post about this possibility: http://www.reddit.com/r/BitcoinMarkets/comments/1rb1mc/potential_for_evil_exchanges_to_frontrunundercut/ http://www.reddit.com/r/BitcoinMarkets/comments/1rb1mc/poten... I think it's very possible for exchanges to do this sort of thing, especially when their technology is so poor that it's difficult to audit how they match orders.
  - evolve2k 13y ago
    Excellent post, please tell us more, there's a whole blog post here on the downsides of bitcoin. Do share :)
    - asuffield 13y ago
tlrobinson 13y ago
Don't stock markets typically have "circuit breakers" as well? Perhaps they're more transparent about it though.
- jzwinck 13y ago
  Circuit breakers stop trading temporarily, they do not undo trades done in the past. There are other procedures for undoing "clearly erroneous" trades but those are generally less automated and sometimes less transparent.

TwoBit 13y ago

I also can't help but wonder if insiders of sites like MtGox are taking advantage of their market knowledge.

n00b101 13y ago
This issue goes well beyond "market knowledge." MtGox _is_ the market; they control the order book, trade matching engine, data feeds and even the custodian accounting system. If you own your very own completely unregulated trading exchange and deposit syatem then you have a big incentive to cheat the market. One way to do so would be to allow your own trades to jump the queue in the order book. By ensuring that your order are always filled ahead of everyone else's (even when you place them later in time) you would have a massive advantage if you start doing market making trades. Another dimension is that MtGox plays not only the role of an exchange but also the role of a custodian for US dollar accounts. MtGox's systems decide how many USD a particular trading account has for buying Bitcoin. This incentivises them to create US dollars "out of thin air" for their own trading account and then use those fictional US dollars to buy Bitcoin from MtGox customers. Combining these two advantages (money "creation" power and total market book control), they could extract huge sums of money from customers through trading without even having to invest a single dollar from the "real world." And if this market making strategy were to go wrong and MtGox loses too much fictional USD currency they could simply reverse the trades! Worst case scenario, if they lost too much money, they could just disappear without paying out customer USD balances. This is why real financial exchanges are heavily regulated and the different roles are played by different legal entities (eg exchange role vs custodian role).
- Anderkent 13y ago
  > Worst case scenario, if they lost too much money, they could just disappear without paying out customer USD balances. So you risk your (incredibly profitable) business just to skim a little on the spread? Doesn't seem worth it.
  - rbobby 13y ago
    Might not be the owner... could be a worker doing it.
  - nullc 13y ago
    And misconduct like that results in clear evidence which none of the people who claim to "know" can produce. A lot of people who just do not understand how thing kind of market works make these allegations— due to things like issuing a market order and then having the trade execute at prices which are dissimilar to the last price but completely explained by the published orderbook.
  - sliverstorm 13y ago
    Ah, but what's the margins? How do they compare to what they can skim?
- hft_throwaway 13y ago
  There's a good reddit post about this possibility: http://www.reddit.com/r/BitcoinMarkets/comments/1rb1mc/potential_for_evil_exchanges_to_frontrunundercut/ http://www.reddit.com/r/BitcoinMarkets/comments/1rb1mc/poten... I think it's very possible for exchanges to do this sort of thing, especially when their technology is so poor that it's difficult to audit how they match orders.
- evolve2k 13y ago
  Excellent post, please tell us more, there's a whole blog post here on the downsides of bitcoin. Do share :)
  - asuffield 13y ago

tlrobinson 13y ago

Don't stock markets typically have "circuit breakers" as well? Perhaps they're more transparent about it though.

jzwinck 13y ago
Circuit breakers stop trading temporarily, they do not undo trades done in the past. There are other procedures for undoing "clearly erroneous" trades but those are generally less automated and sometimes less transparent.