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Kazuo Ishiguro
House of Marbles
Posted - 2010.04.08 23:21:00 - [1]
 

Suppose I offered you a loan contract for 1bn trit, with collateral set at the current market value (let's say 2.85), to be accepted within 3 days from now and then returned 30 days later. How much would you pay me to offer you this contract?

Professor Leech
Transmetropolitan
Posted - 2010.04.08 23:25:00 - [2]
 

Allowing for time value and expected revenue I would pay you -2b for such a contract.

Mahke
Aeon Of Strife
Discord.
Posted - 2010.04.08 23:29:00 - [3]
 

Edited by: Mahke on 08/04/2010 23:29:53
Originally by: Kazuo Ishiguro
Suppose I offered you a loan contract for 1bn trit, with collateral set at the current market value (let's say 2.85), to be accepted within 3 days from now and then returned 30 days later. How much would you pay me to offer you this contract?


One month from now is still before tyrannis.

Prices, if they are going to fall (which for trit I think they will) won't until very shortly before or after the patch.

edit: but drat clever, offering to underwrite a short Very Happy

Alice Celadon
Sniggerdly
Pandemic Legion
Posted - 2010.04.08 23:30:00 - [4]
 

Kaz, just say you're offering to accept futures on trit. I'm sure it's obvious to you (and me) what you're proposing, but as written your proposal reads like garbage and isn't even grammatically clear about who's giving and who's receiving the trit.

Kazuo Ishiguro
House of Marbles
Posted - 2010.04.08 23:37:00 - [5]
 

Originally by: Alice Celadon
Kaz, just say you're offering to accept futures on trit. I'm sure it's obvious to you (and me) what you're proposing, but as written your proposal reads like garbage and isn't even grammatically clear about who's giving and who's receiving the trit.


If I said that I'd offend the trading purists, who'd insist that it isn't a future at all. For the sake of clarity, I mean that I have the trit (located at Jita 4-4), and that the person accepting the loan would need to provide the collateral.

Alice Celadon
Sniggerdly
Pandemic Legion
Posted - 2010.04.09 00:11:00 - [6]
 

It's a sell-side secured future. Probably the defining advantage of a short is increasing the currency liquidity of the person taking the short. In this case -- not so much. Someone should take up Kazuo on the offer, if for no other reason than to begin introducing more complex financial instruments to EVE.

LOL, who am I kidding. Buy low, sell high is beyond the ken of most of us!Razz

Dethmourne Silvermane
Gallente
Origin.
Black Legion.
Posted - 2010.04.09 01:34:00 - [7]
 

I'd spring for it, but I owe a certain individual sufficient amounts as to make this not worthwhile despite potential for profit.

Forum Dweller
Minmatar
Posted - 2010.04.09 02:07:00 - [8]
 

Um, it's already crashing man.

A few weeks ago 2.98/unit in Jita. Today, 2.85. Nobody seems to know what to do. Buy? Sell?

It's chaos.

Weaver Goldentongue
Minmatar
Native Freshfood
Posted - 2010.04.09 07:30:00 - [9]
 

Originally by: Alice Celadon
Someone should take up Kazuo on the offer, if for no other reason than to begin introducing more complex financial instruments to EVE.


<Cough> Aren't you the one who thinks Trit will skyrocket with the upcoming expansion? Wink

Vaerah Vahrokha
Minmatar
Vahrokh Consulting
Posted - 2010.04.09 08:06:00 - [10]
 

Quote:

If I said that I'd offend the trading purists, who'd insist that it isn't a future at all



It's not about being a purist, it's just that a future is generally decoupled from the underlying and almost no one actually ends up confirming the order for the tied good.

A future for what I know (I am not some Harward economist) is a device to exactly avoid having to deal with a tangible item(s), its purpose is to be symbolic to remove the logistics and other negative aspects of trading real goods.


Quote:

<Cough> Aren't you the one who thinks Trit will skyrocket with the upcoming expansion?



First thing they teach at RL trading courses: don't invest what you cannot afford to lose
Second thing: markets are based on greed and fear
Third thing: trading is not gambling, but calculated risk and rigid money management.
Corollary: don't speculate unless you are insider trading, a bank or both.

Kazuo Ishiguro
House of Marbles
Posted - 2010.04.09 09:32:00 - [11]
 

Originally by: Vaerah Vahrokha
A future for what I know (I am not some Harward economist) is a device to exactly avoid having to deal with a tangible item(s), its purpose is to be symbolic to remove the logistics and other negative aspects of trading real goods.


There would be no logistics to worry about, as long as you think purely in terms of Jita prices. I'm just gauging interest in the (rather less detached) activities that are possible within existing game mechanics. So far people seem rather reluctant to make any serious offers Razz

Atima
Minmatar
House of Marbles
Posted - 2010.04.09 09:43:00 - [12]
 

Really this sort of thing should be managed by Selene or block or someone. You deposit isk within the exchange, then 'trade' out of game, i.e. have a running flow of offers.

Why?

Because as VV said we could use the isk value of an item at a given time rarther than the actual item. This increases liquidity and allows the transactions to be processed imediately, rarther than spending the next week buying/selling the item.

Only problem is there simply is not enough interest in this. Also there is no method to get a real time feed of the items value. eve-central cannot be relied upon and I do not want to sit updating the price every minuite.

Mara Rinn
Posted - 2010.04.09 09:57:00 - [13]
 

Originally by: Vaerah Vahrokha
It's not about being a purist, it's just that a future is generally decoupled from the underlying and almost no one actually ends up confirming the order for the tied good.


Ha ha... I have this story about a futures trader who one day ended up with several thousand tonnes of coal moored outside his riverfront offices, because his computer system put a "1" in a particular boolean field instead of "True". I'm further told he managed to move the coal for about ten cents to the dollar, so it wasn't a total loss.

Ji Sama
Caldari
Tash-Murkon Prime Industries
Posted - 2010.04.09 10:20:00 - [14]
 

Yea it will crash, please dump all your stock sooner than later.

Kazuo Ishiguro
House of Marbles
Posted - 2010.04.09 10:23:00 - [15]
 

The moment you move to an OOG service, it becomes much harder to get people involved. That's been tried before, and I don't want to duplicate any of those efforts.

I'm surprised, considering that so many people are predicting a crash, that I haven't had any serious offers yet. Perhaps some of these people are less sincere than they seem, or lack the necessary funds?



Vaerah Vahrokha
Minmatar
Vahrokh Consulting
Posted - 2010.04.09 11:10:00 - [16]
 

Quote:

There would be no logistics to worry about, as long as you think purely in terms of Jita prices. I'm just gauging interest in the (rather less detached) activities that are possible within existing game mechanics. So far people seem rather reluctant to make any serious offers



As you noticed I posted something similar to yesterday's talk on SCC Lounge.

And now I am going to finish the task: as I said yesterday, an important - a fundamental - part of how those securities work is the leverage.


Basically you must provide either:

- a mean to pay you a fraction of the security (ie in Forex you can pay and control 1 mini-lot of 10k euros with 50 euros.

- a mean to leverage the spread. IE if

effective spread value = sell day value - buy day value - costs

and that spread ends up being 20M, no one will bother.

But give a 200 x leverage and suddenly the guy immobilizing some billions (remember the either above) is going to see a 200 x 20M = 4B gain (or loss, if the trend reversed in an expected way).


That's how RL secondary market gets interesting, the results are juicy... when you don't lose.


Quote:

This increases liquidity and allows the transactions to be processed imediately, rarther than spending the next week buying/selling the item.

Only problem is there simply is not enough interest in this. Also there is no method to get a real time feed of the items value. eve-central cannot be relied upon and I do not want to sit updating the price every minuite.



That's imho the ONLY and real unsurpassable obstacle.

Secondary markets need an huge liquidity and continuous trading, otherwise they are not functional.
Who wants to be SURE that once "entered the trade" and discovers he is wrong, he is boned? Totally boned?

In an highly liquid market, you are almost granted someone will buy your security if you want to sell it FAST. Not in EvE, where even in the top hub of all, there's an handful of items (trit being one of them) that even come vaguely close to the amount of transactions per second required.
Now, if only the whole playerbase were passionate about the finance portion of EvE.... but it's not so.


Quote:

Perhaps some of these people are less sincere than they seem, or lack the necessary funds?



There is also a third possible reason, which I stated above (the consequences of lack of leverage).
There's also a fourth possible reason tied to a possible CCP plan that would affect the drop in hi sec trit prices, but I have to go out so I can't write further.

Weaver Goldentongue
Minmatar
Native Freshfood
Posted - 2010.04.09 14:03:00 - [17]
 

Originally by: Atima
Really this sort of thing should be managed by Selene or block or someone. You deposit isk within the exchange, then 'trade' out of game, i.e. have a running flow of offers.

Why?

Because as VV said we could use the isk value of an item at a given time rarther than the actual item. This increases liquidity and allows the transactions to be processed imediately, rarther than spending the next week buying/selling the item.

Only problem is there simply is not enough interest in this. Also there is no method to get a real time feed of the items value. eve-central cannot be relied upon and I do not want to sit updating the price every minuite.


I don't agree with this. Sure, Eve doesn't support the mechanisms you refer to, but in real terms, there is no more liquid item than Trit in Jita. If I were to take up this offer, I wouldn't need to spend a week buying and selling, the item is right there in huge quantities at whatever price is currently available. When I come to complete the contract and replace the 1B Trit, I can buy whenever the price reaches a certain level, or I can hang on till the last minute to get the best possible deal. Either way, I can do it remotely with almost no effort.

I understand it's a little crude compared with modern day financial systems, but I still think the idea has legs.

Letrange
Minmatar
Red Horizon Inc
Cascade Imminent
Posted - 2010.04.09 15:21:00 - [18]
 

Dumb question:

Isn't the proposal of the OP more of a hedge rather than a future?

(not a trader, not active in trading, just curious)

Vaerah Vahrokha
Minmatar
Vahrokh Consulting
Posted - 2010.04.09 15:50:00 - [19]
 

Back and... I might have found an hybrid way to solve the liquidity issue. Warning, this will be a freakingly HUGE post.

But more on this later.


I want to add more observations about Kazuo's experiment.

1) He proposes a short sell. Now, I get the obvious fact that he proposes a short sell exactly because there's no implementation of it in game.

Still, it remains the fact that short selling is impopular:

- Elliot Waves for bear markets are too few and vertical
, the trend is too steep and often jumps down due to snowball MUST GET RID OF THIS NAO! panic effect
.

- Playing on borrowed stuff already sucks (yes, psychology plays a major role in trading). Playing on borrowed stuff AND also seriously risking money on stuff not yours sucks even more.

- Short sells have always been seen in a negative "that guy feeds on disgrace" light. Add this to the incredible BAD effect of panic fire sales and you get RL markets where shortselling is downright forbidden or strictly controlled (see "uptick" rules, just recently gone away).

But most of all, it's the knowledge that if you went long (= bought) i.e. gold and things go dire... you still hold gold. If you short sold and it went bad you hold... your nuts.

thus the possible interested experimentors are even less motivated to try.


2) He chose a bad market. And not because of his fault, but because of CCP's.

Now, let me introduce to the MD peeps the importance of picking a correct secondary market, by using EvE common comparisons and terms.

Basically you need to buy low, sell high (yeah!) or buy high and sell low (short selling, from now on I'll only talk about long. For short just mirror the terms).
Where do you gain? On the difference between the price you bought the stuff - the price you sell - expenses.

Great, isn't it? Now lets park Captain Obvious.
How do you actually execute this delta? (in RL there's also inter-currencies arbitrage and much more but EvE is a simple structure)

Simple. You either

- arbiter the spread (buy order => 0.01 isking => sell order => 0.01 isking), the fact you sit in the same station does not matter over the fact it's arbitrage. It just saves on logistics. Bear with me, I am using awfully bad terminology to make things "easy".

- you "wait it out" (similar to what's known as slow selling in EvE).


"LOLWUT????"

Yup. Ever wondered why in RL some securities go in cents? Some in tenths? Others in thousandth? Because there's a minimum of granularity, below that atomic value it's impossible to record fractional variations.
But wait... Tritanium and Freighters share the SAME price granularity! Too bad, no one cares about those 30-40 cents over a freigther but they DO in the case of Trit.

As I stated above, a fundamental part of secondary markets is the leverage. Leverage is what makes a guy earn so much off a 0.001 euro / dollar variation. It's what makes his very trading worth doing at all. Otherwise without leveraging, the guy should have purchased a true "lot" (they go for 100,000 euros each) to appreciate any income off a 0.001 euro / dollar variation.

And now let's see where the pieces don't fit together: to generate an usable, leveraged trend to "securitize trit *as is*", EvE should support 4 decimal digits. Otherwise it's just too flat or spikey (once leveraged).
So, we cannot truly use EvE as secondary market platform even if people accepted to use Trit as "secondary market currency". It just lacks of expressivity to make it workable.

Vaerah Vahrokha
Minmatar
Vahrokh Consulting
Posted - 2010.04.09 15:53:00 - [20]
 

Being unable to express minimal variations the only path available is to pick another item, one where having just 2 decimal digits is irrelevant. IE some T2 module. But then, other factors make it very hard to use such item as stone of comparison.
Sadly, even if this is painful and possibly a killer, I am really driven to exclude in game trading. IGB should be possible though.


So what to do? And what do to about the lack of liquidity that would stall the whole secondary market at once?
It's just not me, there's several that would love to finally succeed implementing a secondary market in EvE (the real secondary market, not the IPO / bonds etc).


I don't see easy alternatives but there are some surrogates and compromises that could work.
My top issue is that even if I know how to remove many barriers I don't have the time to do it.

We need at least:

1) futures (to start easy) and the related indexes to use as reference
2) securities (duh!)
3) a trading platform of some kind. Possibly one where (like in RL) you can practice on demo securities for a while before switching to "real".
4) automated money management so that the interested parties can buy and sell without resorting to tellers (there's a reason why Forex is automated... just copy and adapt RL if it makes things easy).
5) lack of reliance on a central "elite" ehm authority.
6) OTC capability (over the clock, EvE is a 23/7 trading platform).
7) a liquidity generator (!) since EvE does not have one.

It's clear this is a major operation and requires several persons to work as a team, at least till start up.


1) I can provide some knowledge about implementing both futures and eventually long/short pairs (a la Forex). I and others (Akita?) can also study appropriate granularity and "ticks" for those.
2) The securities are way easier to manage with an external platform. I know how to create appetible indexes and securities.
3) This is less fundamental than it looks. I have provided some free platform examples to people like Selene (for ECR) but I believe a simple Flash / DotNet WEB site would do, for a starter. Once it takes off it becomes worth researching for something more professional. Yes, I am thinking exactly on the models of Yahoo! Finance, EvE-Metrics and so on.
4) see 7
5) It's important to keep the initiative as independent and reliable as possible. The least people are involved, the least human operations are needed, the least dishonest opportunities the better.
6) That's easy if it's hosted on some free external site. I know of some offering lots of features.
7) This is another though point. Because there are humans needed to keep it going. So I'll describe it with its own chapter.

Liquidity generator

I'd try something that:

- Is somewhat present in RL and can be adapted to EvE
- Can actually make a profit (unlike other ISK sink caudrons of the past).

Now, the closest EvE-mentality thing that resembles that would be a variation of mutual / investment fund: a market maker broker (not a clearing house... no larger institution to interface with) would
But the fund - unlike the past - would not be "fed" by volounteers but would possibly make a profit by itself.

Depending on the value of the security, it could be possible to either charge per operation or to include the fee in the spread (a la retail trader Forex way).


Vaerah Vahrokha
Minmatar
Vahrokh Consulting
Posted - 2010.04.09 15:56:00 - [21]
 

The mechanism, different than the RL one (sorry in advance I AM going to post so much garbage), is this: indexes are constantly (ie every 5 mins) updated compounding a series of underlying items (i.e. Mini-MRD (Block?), Mini-Trit, Mini-T2, Mini-Hardeners, Mini-Caps Mini-ReactionMats...).

These indexes don't suffer of EvE limitations. I.e. Mini-Trit (so much traded to deserve its entry) could be valued at underlying value * 100.

So, in a graph you'd see: "Mini-Trit is at 26800". This means that Trit tick value is 100.

Now let's imagine (please correct me if I post garbage, I am aiming at setting the principles) that for Mini-Trit the minimum initial margin is 1 trit "lot", that the trit lot = 10M trit units and that minimum margin requirement is 15% of the value.

This means that you must have an account open with the investment fund and deposited a minimum of 15% of 2.68 * 10M = 4,020,000 ISK.

This means that with about 4M ISK you are controlling 26.8M
ISK
, the "broker" is kindly loaning you 22.8M ISK.

Now, let's assume trit climbs to 2.78 ISK pu (I.e. at Jita). An increase of something as insignificant as 0.1 ISK pu makes your 4.02M ISK control 27.8M worth of value.
Congrats, you just made 27.8 - 26.8M = 1M ISK with 4.02M "parked" ISK. That is, 0.1 trit value increase resulted in almost 20% growth of your account.

Who got the bone here? The guy who shorted the Mini-Trit contract to you. His account now got 1M less.

Now, I am totally out of time and have to cut short on the obvious issues and probable glaring mistakes I did. Hopefully someone else will compound / correct this raw chunk of ideas thrown together.

Claire Voyant
Posted - 2010.04.09 16:10:00 - [22]
 

Edited by: Claire Voyant on 09/04/2010 16:12:58
I am definitely interested in this, although for it to be useful to me the time frame would have to be roughly cetered around Tyrannis, say May 3 through June 2. 15 days before to 15 days after, although to prevent manipulation I'm sure the contracts could be spread around by a few days.

The basic problem from my perspective is that I'm not as bearish on trit as I am the other mins. Let's say my expected decline is 20%. The the most I would pay would be 10%. Of course we would have to wait until closer to May 3 to make the deal, but let me throw that out there for your consideration.

Edit: VV, please don't derail this thread. What has been proposed here in the original post is a simple in-game mechanism that should work as intended.

laksmi2
Posted - 2010.04.09 16:33:00 - [23]
 

come get some Razz

Claire Voyant
Posted - 2010.04.09 16:45:00 - [24]
 

Edited by: Claire Voyant on 09/04/2010 16:45:49
Looks like 2 weeks is the maximum time period, or am I doing it wrong?

Edit: Nevermind, that's the expiration.

nether void
Caldari
Brotherhood of Suicidal Priests
R.A.G.E
Posted - 2010.04.09 20:11:00 - [25]
 

No this does look like a future to me (with what limited knowledge I have of them).

Basically RL scenario of how the last company I worked for used futures:

- Company is a power company
- Company generates via natural gas fired turbines

- Company sees a future on gas which will allow them to produce power at $90/MW
- Company sets up contract with bulk power buyer (typically manufacturer or in some cases grid management [CalISO for instance]) to sell power at $100/MW

-- SCENARIO - GAS PRICES RISE / POWER PRICES REMAIN STABLE --
- Company realizes they can now sell their gas future at $100/MW
- Company buys power from market at $100/MW to supply their buyer
- Company sells their future for $100/MW
- Company makes $10/MW profit without expending maintenance cost of production

-- SCENARIO - GAS PRICES DROP / POWER PRICES REMAIN STABLE --
- Company realizes gas prices have dropped
- Company produces power for buyer at cost $90/MW + maintenance cost
- Company receives $100/MW for power
- Company makes ~$10/MW profit

By locking in the gas future and the contract for the future production of the product, the company secures its margin, but also allows for a chance to get a better margin by being able to trade in the two different markets. This doesn't work that well in EVE because it doesn't seem like it would be that easy to have contracts for product, because as everyone is aware, there's no concequence to abandoning an agreement in this game.

The only way futures would work is if the buyer of the future thinks the price will go up later. If there was a way to create long term production contracts with buyers*, then the futures market would be a no brainer because if the price dropped the producer could then decide to produce instead of sell the future. Either way the producer would make a profit.

*There's not because it's so easy to get into and out of production markets in this game (cost of entry is extremely low compared to RL). You don't need to operate for long periods of time to get your ROI. The exact opposite is true in RL.

Claire Voyant
Posted - 2010.04.09 20:41:00 - [26]
 

I have an additional thought to add. This is really more like a put option, than a pure short sale. So you can also look at the effect of changing the "strike" price.

Assume the current price is 2.85 and look at two different options:

1) I pay 2.85b collateral and 300m in the contract price

2) I pay 3.00b collateral and 150m in the contract price

In both cases, the total I pay out in the beginning is the same, 3.15b.
If at the end of 30 days trit is below 2.85 or above 3.00 both contracts are equivalent, but if the price is between 2.85 and 3.00 I have the chance to recover a little more of my collateral. So contract #2 would be more valuable to me.
If I was wiling to pay 300m for #1 I should be willing to pay more than 150m for contract #2.

Claire Voyant
Posted - 2010.04.09 21:28:00 - [27]
 

I worked in the energy futures market for many years including options on energy futures. The thing that makes a futures market work is that you have a number of different kinds of participants in the market. You can have companies in the industry (suppliers, consumers, refiners, wholesaler and retailers, etc.) wishing to hedge or reduce their risks. You also have speculators (individuals, traders, hedge funds, etc.) who are willing to take on risk if it means the possibility of better rewards. (And there are also arbitrageurs who make money off of market inefficiencies.)

In short, the futures market doesn't make sense if you look at it from only one perspective. You need at least two people who want to trade for different reasons, the classic case being a supplier who wants to sell some of their product at a fixed price in the future and a consumer who wants to buy some of their supplies at a fixed price in the future. In essence, that is all you need for a futures market to work.

But Kaz is not proposing a futures market, all he is suggesting is for two parties to use the in-game loan contract to make a bet on the future direction of prices.


 

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