I meant that the flat system of crypto where (at least before industrial mining), people could spin up mining rigs (which is still possible, I think at least with some altcoins), but also, that the barrier to entry for folks trading crypto is lower than traditional markets. Some may chalk this up to the need for KYC/AML, but I think there are intentional barriers to entry for individuals that people in power don't want to have access to say, equity markets, that don't exist as much in crypto markets. I don't think crypto markets should be used to supplement terrorism, money laundering, tax avoidance, or anything else like that, but if you take a look at say, Robinhood, who tried to lower some of these barriers to entry to traditional markets, I think crypto as a whole is trying to do that. I also have said in other posts, and will continue to, that blockchain analytics will only continue to get more advanced, so the narrative that crypto is only used for illegimate activity is bullshit. I do think that it is a power to the people that can't be stopped, due to its decentralized nature, and that it is the only possibility I've seen so far as an alternative to everything else going on that requires sovereign government policy and currencies (that are backed by war, control, etc).
> Those interested with very low latency are not hedge funds but market makers, and the kind of microstructure signals they exploit is not only orthogonal to what a retail investor would do, but often brings in just bips per trade, meaning the leverage required to make it worth it is anyway out of the retail league.
Thanks for clarifying.
> What is a normal retail investor? Obviously hedge funds are going to be faster to react to e.g. earnings events than you. That doesn't mean this information is not public. It's just that HF pay data providers, invest in automatic data processing and decision making, etc.
Well, this is sort of what I'm saying. As a regular person, you just don't have the same information, or the ability to act on it as quickly. Sure, buy and hold investors aren't really affected, but they are providing liquidity for these folks who can take some advantage. I may be pretty wrong about this, however, it's just like anything where there are friends / contacts / associates. Some parties just have more information, especially if they have money to spend. You did mention earnings though. I just have a hard time believing that hedge funds only act on public information. They might structure their trades based on how not to get flagged, but how do they not have friends or contacts in the space that tell them a thing or two? This is what they are doing full time, so I would imagine they spend a good majority of their time thinking about how to make the most money and not raise any red flags. I actually don't have an issue with this, but I always see claims that the traditional market is totally fair, but it does not seem like a very flat system to me. Those in power seem to have some advantage. If that was how the market was presented (i.e. some people have sway, more information, and the ability to act more quickly than retail), I wouldn't have any issue with this. I see the opposite though, the narrative is that retail traders can make trades without worrying because it's totally equal. If all retail traders were doing was buy and hold, then again, no issue, but not all retail traders trade that way.
> Yes, what about them? The name triggers the imagination of people but there's really nothing fancy about it. The objective of dark pools is to allow the exchange of shares without too much of a movement in the orderbook. This is actually good for both users of dark pool (they get lower slippage) and users of the public market (it prevents artificial big swings in price due to large buyouts, which would be announced anyway). The liquidity at time T in the order book is not tailored to absorb any ridiculous amount that a large investor could be willing to exchange.
Where do I learn more about dark pools? My initial response to learning about them was that they are basically tailored to hide trades from the general public, for the benefit of institutional traders. I was concerned that dark pool operators would also have information that then they could front-run the rest of the market with. I feel like when I make a trade in the equity markets, or if I read something in traditional news, someone else has heard about this earlier that day, or maybe days before, based on insider information, just due to them being more deeply involved with the market. I just don't really see how this is fair (and this is the claim I see time and time again in traditional markets). I don't think all this information is public. If it's in some obscure place, that 95% of the investing public doesn't see, is it really public? Maybe the SEC protects against that, but it seems like the big players have an advantage. It seems like I have a lot of incorrect assumptions though, so I'd like to learn more about this.
> What exchanges do, though, is offer rebates to providers of liquidity (including the market makers that you seem to despise) in exchange for the liquidity they provide. This is not a random decision by the exchange, it's because providing liquidity to the market is beneficial for everyone. As an investor, it means I won't have to worry that I will not be able to sell my shares whenever I want to. It also means that the spread will be tighter, thus lowering my slippage. And subsequently, it also means arbitrage is most likely in place, so I'm not being scammed just because I didn't check the price on 5 different platforms.
Yeah, I get it, this is a quite mature market (and that's a good thing). I still have a feeling that the extremely powerful have sway in the market, in a way that isn't exactly "fair", but maybe it just comes down to the amount of capital they have (but again, I would think that the size of the trades should be on public markets then, not dark pools). Anyway, in the end, what I've learned from all this is how far the traditional markets have come, and how other markets (like crypto, which also have things like dark pools) can learn from this.
> As you learn more about crypto and traditional finance, it'll be fun to compare the two. Your confusion about the role of an exchange in traditional finance might be because you see the crypto world, where a single entity often performs the roles that many entities perform in traditional finance (exchange, clearing firm, broker, etc.).
Yes, I agree!
In terms of what I called antiquated technology, I think there are a lot of layers on traditional finance, and a lot has changed since its beginnings. I think crypto will go through a similar evolution, in terms of tech, regulation, etc. I think we're in the very early stages for crypto and it has a chance to be an even better system.
I do know that HFTs exist in crypto, and it still is the wild west in some ways, but in the end I like that innovation is happening and that there are alternatives to existing systems.
That said, I appreciate all the responses and I'll take some time to learn more about traditional markets.
I don't know that much about this, so you could chalk it up to "great ignorance", I suppose.
I'm a software engineer, interested in crypto, and not that involved in traditional markets (except for holding an S&P 500 index fund).
I do think the exchanges in traditional finance shouldn't have required HFTs in the first place (i.e. it's an antiquated technology). I also think hedge funds and the ultra rich have privileged info, that retail investors don't have.
Anyway, I appreciate the clarification. I like learning about all this.
At what cost are they providing this service though? They make a ridiculous amount of money doing so. Shouldn't the exchanges have offered the best price, and provided liquidity, in the first place?
Flash Boys: A Wall Street Revolt by Michael Lewis painted HFT in a pretty bad way. I have read criticisms of the book, but it's hard to separate out bias from the criticism.
There's also all the heat on Robinhood about selling order flow, which I'm surprised was even news to regular investors. It's great they eliminated fees for normal trades, and I also understand most major brokerages sell order flow as well (and still charged for trades for a long time). I read that Fidelity is the only major player that doesn't sell order flow.
Do you have some sources that someone could learn more about this, ones that don't have a vested interest in painting it in a positive way?
Also, I'm still wondering, considering dark pools [1], and the inside information that would come along with that, since those trades wouldn't hit public markets, how the stock markets can be considered a fair place to trade?
I was going to mention HFT. How is it a level playing field when they are in the picture? Paying top dollar just to be closer and closer to the exchanges to get the fastest, "best price", when really, they have info before anyone else.
Also, what about dark pools?
Contrary to my username, which I just get a kick out of, I don't actually work on wall street or anything, but I've always felt the stock market was rigged for the elite. I think it is very likely that they have info before normal retail investors have any idea.
I like crypto but the way I read this is that it's a good number of the reasons that the existing financial infrastructure is better (particularly once the US infrastructure updates to things like instant FedNow payments).
I think defaulting to using a mixer would be inconvenient and it could get folks flagged for even using it at all.
Also, what ever happened to not re-using addresses? I know it doesn't make it totally private, but I thought it helps some, since you'd still have to tie addresses to identities somewhere in the chain.
I think companies should still provide a way to link accounts via small deposits. It takes a few days, but at least you don't have to share your credentials. (This applies to US accounts, maybe there are better solutions elsewhere.)
If you use Plaid, I think it should only be if there's no other option and you change your credentials after. I've always thought giving away your credentials to a screen scraping company like Plaid was crazy.
In terms of the class action lawsuit, the only one who will see a meaningful payout from this are the lawyers.
If they are able to replace real world contracts one day, that could be a benefit, i.e. escrow and title transfer for real estate. They would need to be pretty complex to do so, since currently title companies track local laws and make sure everything is in order, but, stuff like this could automate some things which are done manually now. There also would probably need to be a way to have human intervention, i.e. being able to upgrade or sidestep the contracts, if something doesn't go as expected, but I still think automating this can modernize certain fields.
In my opinion, the process of buying / selling real estate, at least in the US, seems antiquated. There has to be some way to automate this instead of manually having some escrow company hold funds and then manually releasing them once the sale is complete, and issuing the title (gets more complicated if it's a mortgage vs a cash deal, since a bank loan would also be involved, but either way, it is possible). The smart contracts could be coded in a way where the funds are automatically released, and a title issued, once certain criteria are met. One risk is that the smart contracts could be hacked, but over time the code could be become more solid.
It seems that as a whole the world will move more to automation, over time, and smart contracts might play a part in that. That said smart contracts that can't really be stopped could also become Skynet or something (i.e. Terminator), but I don't think fear of that should prevent us from exploring the possibilities. My point is that smart contracts could automate certain things that are done manually now. They might still require some human involvement, but the amount of human involvement required could be dramatically reduced. I don't think the main benefit of smart contracts is just that they are unregulated. I also don't think that the way smart contracts are used today are the only ways they can be used. It is a new field and many things that folks haven't even thought of yet are possible with this type of technology.
I think it would be worth understanding how Bitcoin works first. It's designed to be more robust. It doesn't change as often (some criticize it due to that), however, it could also be seen as a strength. You could read the Bitcoin white paper [1]. If you wanted to learn more about programming Bitcoin, you could also check out Mastering Bitcoin 2nd Edition - Programming the Open Blockchain by Andreas M. Antonopoulos [2].
Ethereum was created after Bitcoin. It was designed to be more of an open programming platform. It was designed to be Turing Complete and enabled the use of "smart contracts". The DeFi space runs on smart contracts and Ethereum kicked off DeFi. This is the Ethereum white paper [3]. Mastering Ethereum by Andreas M. Antonopoulos & Gavin Wood is another book you could check out [4].
Here are a couple of introductions to DeFi, as well [5][6].
The hack that everyone is discussing here was on Poly Network, which a layer 2 solution for Ethereum [7]. Layer 2 solutions were created due to lower the high gas fees on Ethereum, as well as increase transaction throughput. Ethereum itself is also working on moving to Ethereum 2.0 which would help address the issues that layer 2 solutions are trying to solve [7].
Edit: Poly Network actually appears to be more of a bridge between different networks (Ethereum, Polygon and Binance Smart Chain) [9], so it's worth noting that this wasn't a direct hack on Polygon, which is a layer 2 solution for Ethereum.
It is already the taxpayer’s responsibility to report their capital gains.
The IRS has issued "John Doe" summons to Coinbase in 2016 [1] and Kraken in 2021 [2]. They also already gave warnings to 10,000 US tax payers, in 2019, that they thought did not pay their fair share of crypto taxes [3]. They are working with plenty of information already.
Anyone who chooses to omit capital gains from crypto may also see consequences in the future. Most blockchains are immutable public ledgers. The auditing of this technology will only get more advanced over time.
To your point about depositing, how does the exchange know the original price that the crypto deposited was purchased at, when it could’ve been purchased elsewhere (including a different centralized exchange like Coinbase, Kraken, KuCoin or Binance, or a decentralized exchange like Uniswap), or perhaps it was mined, or perhaps it was from a fork of another coin (with the current US tax laws, the cost basis is zero from a fork). It’s not as simple as you are making it sound when the source of the crypto is unknown.
How would formal verification actually work for a single exchange to calculate cost basis, i.e. the gain or loss, considering all these different cases? The people making these laws do not actually know in practice how these things would be enforced by the exchanges. They are trying to fit old securities laws into a new technology. Just saying that's it's too complicated is not the right answer. I think laws should be adjusted to accommodate for new innovations. I also think people should pay their taxes and crypto should not be used as a method of tax avoidance.