Author [EN] [ZH] [ES] [PT] [IT] [DE] [FR] [NL] [TR] [SR] [AR] [RU] [EN] [ZH] [ES] [PT] [IT] [DE] [FR] [NL] [TR] [SR] [AR] [RU] [EN] [ZH] [ES] [PT] [IT] [DE] [FR] [NL] [TR] [SR] [AR] [RU] Topic: Potential Market Manipulations on BitAssets  (Read 684 times)

0 Members and 1 Guest are viewing this topic.

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BTS: starspirit
Potential Market Manipulations on BitAssets
« on: November 29, 2014, 09:52:02 PM »

In thinking about arbitrage risks, I've come across a number of situations where bitAssets could potentially be manipulated. I say potentially, because there may be reasons why such attempts either don't make sense economically, or are prevented by a rule I've overlooked, or are just practically infeasible. Nevertheless, they might be worth discussing to ensure the resilience of bitAssets. Even though I was a bit reluctant to map out the crimes, Agent86 suggested to me that it would be better for an open discussion. This is not meant to be a comprehensive list, and others may present similar situations to be alert to.

(1) Front-running of expired shorts

We can see when shorts are about to be forced to cover in the market due to expiries. Its possible in this situation to buy bitAsset just prior to the cover at the lowest ask, then set a sell order a distance into the sell queue where it is guaranteed to be picked up by the volume of the short-cover. As the sell price will be higher, a risk-free profit results, at the expense of the short.

Some possible ways to mitigate this manipulation - (i) if enough market participants try to benefit from this, they will bunch their sells very close together, lowering the cost to the short (ii) it might be possible to randomise the timing of expired shorts over some window to make it riskier for front-runners, though this makes the rolls harder for shorts to manage

(2) Forced short-squeeze

If the BTS market is less liquid than the bitAsset market (which at some point in future could conceivably be the case with bitUSD), then a large enough player could force the BTS price down substantially, and conceivably trigger an amount of margin calls on shorts that overwhelms the ability of the current sell/short queue to absorb it. If this player sat in the market with an incredibly high sell bitUSD order (e.g. on $1 of bitUSD), knowing it must be hit, they would effectively win nearly all of the BTS of these shorts held in the pool for next to nothing. This in turn could leave remaining bitUSD holders significantly under-collateralised.

Some possible ways to mitigate this manipulation - (i) don't allow margin calls on shorts to force-buy at more than a limited premium above the peg, as any higher than this actually reduces the collateral protection for remaining bitUSD holders, defying the point of margin calls in the first place

(3) Bank run

If the bitAsset became suddenly under-collateralised (e.g. if BTS collapses substantially in a short period), then margin calls are forced on nearly all remaining shorts. Anybody sitting in the sell queue at that time gets paid full value on their bitAsset (or potentially much better), which means that the collateralisation ratio on the pool falls further for the remaining bitAsset holders. If it does not play out all at once, but as a succession of BTS falls forcing waves of short-covering, the process continues until the BTS pool is all consumed leaving the last bag-holders with nothing. The analogy I draw is a bank-run. During such an event, there is also much greater vulnerability to players trying to pull off the short-squeeze above, because the required push on the BTS price is less to trigger the margin calls.

Some possible ways to mitigate this risk - (i) don't allow margin calls on shorts to force-buy at a price beyond which the collateral pool is unfairly compromised for remaining bitAsset holders - this would be the fair settlement price if the market were settled up (ii) close the market in the event of an under-collateralisation event - settle/reset the market, or consider another mechanism for replenishing the pool (?)

(4) Collusion by free BTS holders

If bitAssets grew dramatically, but BTS market cap did not grow as fast, its possible the BTS inside the collateral pool increases to a large percentage of all BTS on issue. This BTS cannot be traded on exchanges. In this case the owners of the remaining free-float BTS have a greater chance of colluding. For example, they could buy the bitAsset, withhold their BTS from being used to create more bitAsset, force the bitAsset to a high premium over the peg and sell it. The BTS market on the exchanges would also be less liquid, so they might also attempt the short-squeeze above at an opportune time.

Offline toast

Re: Potential Market Manipulations on BitAssets
« Reply #1 on: November 29, 2014, 09:58:57 PM »
Prior discussions, covers #2 and #3 especially well I think:   https://bitsharestalk.org/index.php?topic=3130.0

Also I think #1 is not an attack but is expected behavior. You should get rewarded for trading towards the true price and you should get punished by trying to sell undervalued.
Quote
We can see when shorts are about to be forced to cover in the market due to expiries. Its possible in this situation to buy bitAsset just prior to the cover at the lowest ask, then set a sell order a distance into the sell queue where it is guaranteed to be picked up by the volume of the short-cover. As the sell price will be higher, a risk-free profit results, at the expense of the short.
Do not use this post as information for making any important decisions. The only agreements I ever make are informal and non-binding. Take the same precautions as when dealing with a compromised account, scammer, sockpuppet, etc.

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BTS: starspirit
Re: Potential Market Manipulations on BitAssets
« Reply #2 on: November 29, 2014, 11:08:06 PM »
Prior discussions, covers #2 and #3 especially well I think:   https://bitsharestalk.org/index.php?topic=3130.0

Also I think #1 is not an attack but is expected behavior. You should get rewarded for trading towards the true price and you should get punished by trying to sell undervalued.
Quote
We can see when shorts are about to be forced to cover in the market due to expiries. Its possible in this situation to buy bitAsset just prior to the cover at the lowest ask, then set a sell order a distance into the sell queue where it is guaranteed to be picked up by the volume of the short-cover. As the sell price will be higher, a risk-free profit results, at the expense of the short.

toast, thanks for pointing out the previous thread on this issue. There are clearly many variations on these types of manipulations with their own nuances. I think the manipulations are feasible, others can decide if they agree.

For (1), its not the low sellers getting punished, its the short. The low seller gets the price he asked for. The short has to pay a higher price than he otherwise would have.


Offline toast

Re: Potential Market Manipulations on BitAssets
« Reply #3 on: November 29, 2014, 11:14:10 PM »
But why is that bad or a manipulation? That's no more of an attack than saying "if bitUSD is undervalued, and I buy some and resell it higher, than a later bitUSD buyer won't get the better price". The short *should* get punished for not buying back the bitUSD himself at a cheap price earlier, no?
Do not use this post as information for making any important decisions. The only agreements I ever make are informal and non-binding. Take the same precautions as when dealing with a compromised account, scammer, sockpuppet, etc.

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BTS: starspirit
Re: Potential Market Manipulations on BitAssets
« Reply #4 on: November 30, 2014, 12:09:52 AM »
But why is that bad or a manipulation? That's no more of an attack than saying "if bitUSD is undervalued, and I buy some and resell it higher, than a later bitUSD buyer won't get the better price". The short *should* get punished for not buying back the bitUSD himself at a cheap price earlier, no?
Good point. Manipulation is not the best classification, but it is a way that certain market participants can be unfairly taken advantage of. It's not always an appropriate punishment  for any short that has not covered before expiry. Maybe the bitAsset was trading at a premium beforehand, or maybe there was not enough liquidity before expiry, or some other situation preventing the short from taking an early gain. And maybe on expiry they will also be forced to buy above the peg, which is an unnecessary penalty and unnecessary liquidity provision to the market.

Offline toast

Re: Potential Market Manipulations on BitAssets
« Reply #5 on: November 30, 2014, 12:11:22 AM »
But why is that bad or a manipulation? That's no more of an attack than saying "if bitUSD is undervalued, and I buy some and resell it higher, than a later bitUSD buyer won't get the better price". The short *should* get punished for not buying back the bitUSD himself at a cheap price earlier, no?
Good point. Manipulation is not the best classification, but it is a way that certain market participants can be unfairly taken advantage of. It's not always an appropriate punishment  for any short that has not covered before expiry. Maybe the bitAsset was trading at a premium beforehand, or maybe there was not enough liquidity before expiry, or some other situation preventing the short from taking an early gain. And maybe on expiry they will also be forced to buy above the peg, which is an unnecessary penalty and unnecessary liquidity provision to the market.

Expired shorts don't ever buy back above the price feed, they just make a buy wall there.
Do not use this post as information for making any important decisions. The only agreements I ever make are informal and non-binding. Take the same precautions as when dealing with a compromised account, scammer, sockpuppet, etc.

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BTS: starspirit
Re: Potential Market Manipulations on BitAssets
« Reply #6 on: November 30, 2014, 12:44:49 AM »
Expired shorts don't ever buy back above the price feed, they just make a buy wall there.
Ahh, that's good - I was not aware of that! Was it a recent change or introduced with the initial expiry rules?

Offline toast

Re: Potential Market Manipulations on BitAssets
« Reply #7 on: November 30, 2014, 12:50:38 AM »
Expired shorts don't ever buy back above the price feed, they just make a buy wall there.
Ahh, that's good - I was not aware of that! Was it a recent change or introduced with the initial expiry rules?

I think it's part of the original expiry rules. It also doesn't trigger until there's a real bid at or above that price. Not sure the point there since you just have to poke it market with a tiny order.
Do not use this post as information for making any important decisions. The only agreements I ever make are informal and non-binding. Take the same precautions as when dealing with a compromised account, scammer, sockpuppet, etc.

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BTS: starspirit
Re: Potential Market Manipulations on BitAssets
« Reply #8 on: November 30, 2014, 01:26:42 AM »
Expired shorts don't ever buy back above the price feed, they just make a buy wall there.
Ahh, that's good - I was not aware of that! Was it a recent change or introduced with the initial expiry rules?

I think it's part of the original expiry rules. It also doesn't trigger until there's a real bid at or above that price. Not sure the point there since you just have to poke it market with a tiny order.
I wonder if a similar mechanism can be used for margin calls then, so that in the short squeeze and bank run scenarios (2) and (3) it does not unfairly distribute BTS away from remaining bitAsset holders and reduce collateralisation. The price for the buy wall in that case would not be the price feed, but initially I'm thinking something like the Price Feed x Current Collateralisation Ratio. This would offer superior protection to bitAsset holders against those manipulations (although shorts can still be disadvantaged by a short squeeze).

zerosum

  • Guest
Re: Potential Market Manipulations on BitAssets
« Reply #9 on: November 30, 2014, 04:24:54 AM »

Believe it or not, I have figured out a way to never make a loosing trade in the BTS system.

At this early stage I am ready to trade this priceless secret, for just 7,000 K BTS, per request.

 :) :) :)

Offline jsidhu

  • Hero Member
  • *****
  • Posts: 1337
    • View Profile
Re: Potential Market Manipulations on BitAssets
« Reply #10 on: November 30, 2014, 05:00:33 AM »
Someone has to lose for u to win.. Those coins u win spendable? U want 7000000 bts for it lol?
Hired by blockchain | Developer
delegate: dev.sidhujag

Offline Agent86

  • Sr. Member
  • ****
  • Posts: 471
  • BTSX: agent86
    • View Profile
Re: Potential Market Manipulations on BitAssets
« Reply #11 on: December 01, 2014, 07:18:11 PM »
Expired shorts don't ever buy back above the price feed, they just make a buy wall there.
Ahh, that's good - I was not aware of that! Was it a recent change or introduced with the initial expiry rules?
My opinion is that this is not a good rule.  I would rather see shorts have to take the risk that they may pay above feed price.  I think this rule makes the likelihood of under-collateralized bitAssets higher.

Offline bytemaster

Re: Potential Market Manipulations on BitAssets
« Reply #12 on: December 01, 2014, 08:10:44 PM »
Expired shorts don't ever buy back above the price feed, they just make a buy wall there.
Ahh, that's good - I was not aware of that! Was it a recent change or introduced with the initial expiry rules?
My opinion is that this is not a good rule.  I would rather see shorts have to take the risk that they may pay above feed price.  I think this rule makes the likelihood of under-collateralized bitAssets higher.

Within limit or we get new attacks on thin markets.
For the latest updates checkout my blog: http://bytemaster.bitshares.org
Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline arhag

  • Hero Member
  • *****
  • Posts: 1214
    • View Profile
    • My posts on Steem
  • BTS: arhag
  • GitHub: arhag
Re: Potential Market Manipulations on BitAssets
« Reply #13 on: December 01, 2014, 08:13:28 PM »
Expired shorts don't ever buy back above the price feed, they just make a buy wall there.
Ahh, that's good - I was not aware of that! Was it a recent change or introduced with the initial expiry rules?

I think it's part of the original expiry rules. It also doesn't trigger until there's a real bid at or above that price. Not sure the point there since you just have to poke it market with a tiny order.
I wonder if a similar mechanism can be used for margin calls then, so that in the short squeeze and bank run scenarios (2) and (3) it does not unfairly distribute BTS away from remaining bitAsset holders and reduce collateralisation. The price for the buy wall in that case would not be the price feed, but initially I'm thinking something like the Price Feed x Current Collateralisation Ratio. This would offer superior protection to bitAsset holders against those manipulations (although shorts can still be disadvantaged by a short squeeze).

Is price feed multiplied by current collateralization ratio correct? I would think it would be something like total BTS held for margin call purposes by the blockchain for the BTS/BitAsset market divided by the total BitAsset debt those short positions owe (or the reciprocal of that depending on the way you look at the market). So, I would imagine a margin call would be a limit BitAsset buy order where the price limit is the price at which all of the BTS in collateral is required to pay off the BitAsset debt. If the price feed goes above the margin call price for the short, the short is called as usual if possible. However, if the price feed ever moves so fast that it goes above the undercollateralization price limit for the short before the margin call can successfully happen, then all of the BTS collateral in the short position would be taken and pooled into a specific margin call fund for the BitAsset market (the owner of the short position of course loses all of his BTS held in collateral but also no longer has any of the BitAsset debt), and all of the BitAsset debts from these fully called short positions would be summed together to calculate a total BitAsset debt owed by the blockchain to itself (for destruction purposes). Basically the blockchain would take over the shorts that are undercollateralized. The total BTS held in the margin call fund divided by the total BitAsset debt owed by the blockchain to itself would be the price (in BTS/BitAsset) at which the blockchain places the single BitAsset buy order for a quantity equal to the total BitAsset debt owed by the blockchain to itself. This price would be under the price feed in the case of undercollateralization, which means if enough BitAsset holders want to exit they would be forced to sell under the peg. But the BitAsset holders quick to get out early would no longer be able to drain all of the BTS collateral at the price feed to the detriment of the slower BitAsset holders left holding the bag with BitAssets that have no BTS left to back them (assuming no new shorts enter after the undercollateralization event begins because they are undercut by enormous BitAsset sells below the price feed).
« Last Edit: December 01, 2014, 08:19:05 PM by arhag »

Offline Agent86

  • Sr. Member
  • ****
  • Posts: 471
  • BTSX: agent86
    • View Profile
Re: Potential Market Manipulations on BitAssets
« Reply #14 on: December 01, 2014, 08:30:45 PM »
Expired shorts don't ever buy back above the price feed, they just make a buy wall there.
Ahh, that's good - I was not aware of that! Was it a recent change or introduced with the initial expiry rules?
My opinion is that this is not a good rule.  I would rather see shorts have to take the risk that they may pay above feed price.  I think this rule makes the likelihood of under-collateralized bitAssets higher.

Within limit or we get new attacks on thin markets.
I don't have a strong objection to a limit that at least gives substantial room for shorts to be forced to cover above the peg when no other sellers exist.

But generally short sellers need to change their behavior to mitigate and protect themselves from these "attacks".  If we allow short sellers to sell at a fixed offset above the peg, these are tools short sellers can use to ensure sufficient depth and protect themselves from a short squeeze.  Protecting bitAsset holders from loss is more important than protecting short sellers.  I also think we should ultimately be using the lowest priced bitUSD for sale as a measure for margin calls and not the price feed.

 

Google+