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Regulators Are Trying Turn Crypto Into Forex
How big is the risk of centralized exchanges?
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The forex trading industry was like this for years. Almost all brokers were market makers i.e. they traded against their clients. Client orders never went to the actual market but was kept in house. It is only over the last decade or so were brokers have become more transparent about this and were you now get things like STP and ECN networks i.e. where brokers pass your order straight through to the market. Guess the crypto industry will also go trough the same kind of thing.
Madoff built its Primex and the world's four largest firms came. Why? In the biggest trading coup of 1999, two poor boys from Brooklyn found a way to legitimize how a firm can retain its own order flow in the coming decimal pricing environment. One of the six original firms whose experimental price quotations in 1971 on a computer network gave birth to the Nasdaq Stock Market, no market maker has been more innovative or has dared to try more new things than Bernard L. Madoff & Co. This catalyst of trading change is run by Bernie, EQUITIES Achiever of 1989, and his brother Peter, who is a computerized trading whiz. Assisted by over 30 family members among over 200 employees, the firm has been profitable every year for 38 years and the firm's capital is now well over $250 million. While Madoff was big early in Nasdaq, the firm almost totally withdrew to concentrate on lucrative Third Market trading of 650 of the largest caps on the NYSE off the exchange floor. Quickly the firm learned it had to give print protection to customers because the NYSE does it. Not so on Nasdaq so orders are not always executed there. Recently Madoff returned to the Nasdaq market, now ranking 8th in the wholesale category. (See page 26.) In a few short years, its Nasdaq business soared from zero to 25% as it pioneered price improvement and limit order protection for 200 of Nasdaq's largest caps. Now Madoff's Primex electronic trading platform could have a dramatic impact of both NYSE and Nasdaq, not to mention the other global markets. But first a little background. Awhile ago Big Board Chairman Richard Grasso scored a triumph when some huge brokers brought back much of their trading in NYSE stocks back from the regional stock exchanges. However, laughs Bernie Madoff, "The news of the death of off NYSE stock trading was premature." A very bright man, Madoff is successful because he knows what makes Wall Streeters tick and caters to their basic need. It is the battle to get or keep order flow-the lifeblood of a brokerage business. The giant brokerage firms take an attitude about a customer's order that this is their business and they want to execute it where it is most efficient and profitable for them. They want to cut out middlemen who are not their middlemen. Some bought exchange specialists or put up special super NYSE booths, but Madoff dismisses such efforts as mere "Band-Aids." The SEC would like to see the abolition or at least liberalization of NYSE Rule 390 which in the name of preventing market fragmentation, but severely limits how member firms can trade NYSE stocks off the exchange floor. "NYSE is very creative and has been delaying the inevitable-to allow their exchange members to trade with their own order flow and not pass it through a franchise where the order may be crossed with a competing firm and you don't get both the buy and the sell sides of the commission," says Madoff. "These huge firms are willing to take risks to accommodate their order flow so there is liquidity to execute orders and also possible trading profits from it." Trends have caused some giant brokers to rethink their relationships with the NYSE. On line trading is forcing full service firms to lower their commissions. How do they offset this? One easy way is to invest capital in trading and control more of their order flow. So today firms don't care as much where they do trading so long as it is efficient and cheap. That is why four giant firms approached tiny Madoff when outsiders might expect it happened the other way around. Madoff itself was facing a troubling trend. World stock pricing is going decimal and making the old issue of seeking price improvement for your customers very complicated. Spreads, which can now be in pennies, will become tiny and possible prices more numerous. Technology is also improving so orders can be exposed more widely than ever before was possible. "We'd like to believe we were the first ones to do price improvement, certainly on Nasdaq but even in the listed environment where we had a limit order mechanism to expose our orders," says Madoff. "NYSE exposed them in the auction on the floor; the regionals on their's. We built a system that electronically changed our quote and reflects it though ITS thoughout the broad market and we did the same thing on Nasdaq. However, the way we do it now, you change your quote, hang it out there for 30 seconds and wait--no pray--for an interaction is not going to work in a decimal environment. Wondering how to upgrade his vulnerable capability before U.S. decimalization of quotes hits, Peter Madoff had the firm buy the electronic auction concept Primex from its inventor, who retained a small part. Then Peter began to redesign it to make it user-friendly. There was no plan to seek any partners. The goal was to develop it in America and then bring it worldwide. The system could make it possible to expose your order to an unlimited universe of as many possible buyers as are out there. The idea was Primex should be open not just to Madoff customers, or just the NYSE 500 broker dealers but to everybody who wanted to enter quotes. This would include market makers in options and down the road the public who could access Primex over the Internet. Suddenly as the Madoffs redesigned Primex, Goldman Sachs and Merrill Lynch found out about it and joined the venture. Primex was a way for both to do price improvement in a decimal price environment and to make sure the order flow they internalize will be given the best possible process and competing exposure so they will be validated and not subject to conflict of interest charges. "Goldman Sachs and Merrill Lynch?" says Madoff. "Having them for initial partners was a dream for two little boys from Brooklyn." While pinching themselves to be sure they were awake, Smith Barney and Morgan Stanley also joined. Their partners were the four largest brokers in the world and together the five control about 60% of the U.S. order flow. Primex will trade NYSE as well as Nasdaq stocks. The plan is to get started in the USA and then expand it first to Europe, Latin America and then Asia. Preferably Primex will negotiate a way to use the primary markets NYSE and Nasdaq as vehicles if deals which make sense to the investors can he struck. Otherwise, regional exchanges should be happy to help or Primex could become an alternative market or ECN. Their famous partners removed the initial credibility concern. Whether trading on NYSE or Nasdaq, the four partners have a reputation for integrity and fairness in dealing with their customers. It will remain no matter where their orders flow, Primex could be the start of something big.
No you are often times betting against other degens. There isn’t always a market maker taking the other side of the trade like it’s a non ECN forex broker lol. Retail counter parties exist
I do not have a full grasp of how the Crypto market microstructure works since its pretty opaque and there is no ECN amongst the different exchanges. I expect coordinated curbs amongst the exchanges. Things like (oops technical issues or we now have new security measures in place you must wait 48 hours to close positions etc) It will be a rapid slope down. I can't say how deep the rabbit hole will go. If you have crypto sitting in an exchange I highly recommend taking it offline to a cold wallet. I have a feeling by the end of next week there will be difficulty in customers being able to withdraw assets.
You are trusting a company. Companies can go bankrupt. There are a multitude of reasons they could go bankrupt, from bad management, to being hacked, sysadmins taking crypto out of cold storage and stealing it, etc. What would happen in case of bankruptcy? As always, you're a creditor. Sometimes you get some of your money back, sometimes you don't. Who gets their money first follows some rules. In case of Coinbase that's probably American rules (I looked it up and they seem to be in California). But in case of that bankrupty you may get your money back, you may get some of it back, or you may get nothing back. That is a risk. Now, how big you think that risk is depends on assumptions. How big is the chance of Coinbase actually going bankrupt? If you think that chance is 1%, you should think whether a 1% chance of losing all your money is acceptable to you. To me, it wouldn't be. But regardless what the chance of Coinbase going bankrupt is (0.1%, 1%, 10%, 50%, I don't know), it's certainly not 0%. So there is some risk and it's not completely safe. If you hold funds on such a platform you must be aware that there always is some risk. If that risk is tolerable to you is of course your choice. I acknowledge there are risks of holding your crypto in your own wallet. You could be scammed into giving away your recovery phrase. You could lose your private keys and recovery phrase and lose access to your assets. But these are things you have the chance to prevent yourself. You have no influence in making sure the management of Coinbase does a good job or they keep their servers safe. If you're holding crypto in your own wallet, the only risk you have is yourself. ​ ===== Crypto-only text ends here, what follows is a comparison to non-crypto world ===== Finally, if you think "Well, if I'm buying a stock or ETF, don't I have the same risks?". No, you don't. I'm talking about the laws in my country now but I imagine they will be similar in most countries, at least the first part is certainly not specific to my country. The brokerage is essentially a bank, or a company regulated like a bank. I buy stocks or ETFs through them. The broker doesn't hold them for me, they are held by a CSD (central securities depository), and just the book entry there is changed... to me, not the bank/broker, to my name, my tax ID. Should the broker/bank go bankrupt, these assets would not be included in the company's assets and no other creditor could ever gain access to them. In practice, I could probably just transfer my assets to another, non-bankrupt broker, and they were always mine. Worst case, I couldn't sell them for a week or two. For crypto, such regulation and security does not exist yet (unless you buy an ECN or Future on crypto, then you're in the stocks/futures territory again). On top of that, if I hold cash funds with the broker, they would - in my case - be secured by a fund by the European Union which would cover up to 100k EUR (per bank, if I have multiple accounts with banks it's 100k each, 200k if it's a shared account with another person, e.g. your spouse). If the bank goes bankrupt, I will get my money back up to that amount from these deposit guarantee schemes of the EU. I know countries like the UK have similar systems, and I'd guess probably the US has, too.
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Do you don’t think institutional investors benefit form ECN more than retail? That’s cute.
It can happen and did in the equity ECN networks. If the order book is wiped out and your now top of the book then any market orders will get filled by your 5 dollar resting order and it will cross. Crypto exchanges are all fragmented and who knows how things would glitch under undue market events. Why not keep a resting bid of 5 just in case, you might get lucky.
Yeah, its "a lot" of money but it's a tiny fraction of a fraction of what porn used to be, and OnlyFans doesn't need crypto...neither do toy sales, and those 2 make up the vast majority of porn industry revenues these days No joke, one of my closest friends of 30y works in the porn industry on the sales side, he works at East Coast News at the headquarters in E.Windsor (where I went to HS incidentally, I know SO MANY people who worked at the warehouse there as teens lol) they are the largest distributor, worldwide, by a large margin, his wife runs NE.Corridor sales, basically the entire Atlantic Coast, the vast majority of the industry is toys and novelties, everything ships discreet direct to consumer, if you've bought a toy or sex novelty there's like a 90% chance it was drop shipped from ECN I dont see where crypto fits in tbh....no one really does anything with porn that needs crypto, its totally free if you want it, if you want any toys or novelties they are easy to get dropshipped, if you want to throw some money at some onlyfans girl/guy its simple and painless.... im sure there is stuff around the margins where crypto may grease the wheels a bit but any of a dozen coins/tokens can already do that....wtf need is there for a porn specific coin?
Yes, if you were in the Forex brokers space, you'd know that basically all the centralized Bitcoin exchanges are what is known as "Market makers" and can act like what you describe above. In the Forex space it's good to avoid any MM and go for ECN (network that match buyers and sellers automatically) or at least non-dealing desk STP (straight through processing).