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By Points and Figures (Reporter)
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Transparency Is Good

Thursday, April 19, 2018 7:57
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Saw that the state of New York is going to pressure crypto-exchanges to be more transparent.  This is a good thing.  I was cruising around at various sites and some of them don’t even publish a transparent fee schedule.  It would be nice to know the price of something before you bought it.

Fee schedules at traditional exchanges can be archaic, but at least they are out there.

From the linked WSJ article, “The letter requests information on basic trading rules, fee structures, policies and safeguards to prevent conflicts of interest and fraud, protection of customer assets, and the use of automated programs, or “bots” on the exchanges. The letter acknowledges that some of the questions may have answers the exchanges already provide on their websites.”

I might go a few steps further.

  • I might show how they calculate margin.  Is it accounting margin or is it calculated using some sort of statistical analysis?  If it’s calculated using stats, show the basic statistical formula.
  • I might ask that they disclose the amount of counter-party risk someone accepts when they trade on an exchange.  What happens if the opposite party can’t perform on their obligation?
  • Are there custodians for trades?
  • I might also show how the matching engine matches trades.  Is it FIFO?  Is there an allocation algorithm?  Is there an auto spreader that shows phantom bids and offers based on other order books?  How does the order book work?  Do some traders get special deals?  Are there co-location deals?
  • Do they allow and charge for wash trades and what percentage of the daily trading volume is washed trades?
  • Are there disciplinary committees to govern rogue traders?   How are they selected and how do they operate?  Are there standards for trade?
  • Does the exchange have a compliance officer?  Does it have systems for compliance?
  • Are there block trading rules and how are blocks reported?  Are there rules around shorting?  Are there position limits?
  • Are there preferences for specialists?  Designated market makers? How are those assigned?  What duties do those participants have in order to receive a special deal?  What are the consequences if they don’t follow through when the market gets hectic?
  • Is there transparent daily settlement and how does the money circulate through the system?  How is that settlement price derived?

Just because you slap the word “exchange” on something doesn’t mean it’s all on the up and up and that the internal systems that people are used to exist inside a new exchange.  I also find that just because you were a trader doesn’t mean you understand all the inner workings of an exchange.  This stuff is complex if you want to do it right.  It’s not just matching up order flow.


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