An Alternative to the Order Book as the Market Design of a Crypto-Economic Trading Platform

In a crypto-economic trading platform:

  • “The network becomes the exchange”
  • Snapchat (ephemeral) bid-asks
  • User-defined smart contracts

The order book is a market design for the exchange of goods and assets.  It dates back to the European coffee houses of the late 1600s.  In London, Jonathan’s Coffee House was a significant meeting place for traders in London in the 1700s. It later became the site of the first London Stock Exchange.

In the late 1700s, in what later became known as New York City, Dutch traders met at a Buttonwood tree in lower Manhattan island to buy and sell goods coming into the port.   Now know as Wall Street, this location became the center of financial asset exchange in the United States.

Until the 1970s, stock exchanges were characterized by a market design involving traders gathering around pits with specialists manually matching bids and asks in paper order books (see below).

The great financial economist Fisher Black wrote a prophetic article in 1971 called “Toward A Fully Automatic Stock Exchange”   where he laid out the implications of the coming automation of the manual order book.  He speculated on what the computerization of the order book would mean for bidding mechanisms, liquidity and overall stock market efficiency.

Screenshot of Bid-Ask Order Book of Poloniex

Market design, indeed all design related to computers, is coupled tightly to the computer technology itself.  Just because one design is associated with a particular computer technology does not mean that the same design should be mindlessly carried over when the computer technology changes.

We recall the mindless carry over of the 80 character line limit established by IBM for punch cards in the 1920s to cathode ray tube (CRT) terminals in the 1970s.

There is a whole host of other instances of mindless carry over of designs when the technology changes.  One notable example is the organization of the factory floor after the conversion of machine power from a centralized shaft driven by water to decentralized electric power.

In the last several years, there has emerged a new decentralized, peer-to-peer (p2p) paradigm in computer architecture propelled by several trends — Internet of Things (IoT), autonomous vehicle-to-device (v2x) communication, and crypto.

This change demands a rethinking of the appropriateness of the centralized client-server order book market design in a crypto-economic platform.

The trend away from client server architecture is driven by a need to do more raw compute “at the edge” before sending data to the server for storage and higher order analytics.  This is known as “edge computing.”  The use cases for edge computing are Internet of Things (IoT) and autonomous vehicle-to-device (V2X) communication.

The trend away from client server architecture is also driven by the tremendous interest in Bitcoin, Blockchain and Ethereum.  Interest in crypto could be the start of a paradigm shift away client server financial intermediaries earning opaque rents and toward decentralized, trustless p2p protocols for validating and accounting for the exchange of financial assets.

A true true, decentralized crypto-economy involves not only a DLT layer but also high speed transaction layer. 

The thesis of this paper is that the time is now to consider a transaction layer with a true decentralized market design.

We believe that publish-subscribe will be the leading protocol of the transaction layer as it has already been deployed at scale an the platform behind several MMO games (from MZ) and chat platforms (WhatApp from Facebook, WeChat from TenCent).

 What is needed is an innovative p2p market design.  It could be along the lines a many-to-many, high frequency “take it or leave it” (TIOLI) publish-subscribe mechanism which could also be described as a discrete time, many-to-many, high frequency version of the Myerson auction.

Value Proposition:

  • user-defined contracts ( e.g. options with odd expiration dates, long-short pairs, straddles)
  • tokens earned by peers supplying liquidity spread contracts
  • elimination of latency rents going to HFT and server co-location fees going to exchange
  • elimination of “data ownership” rents earned by exchange

Specification suggestions:

  • high frequency, many-to-many, pub-sub protocol
  • messages in form of  Myerson “take it or leave it” (TIOLI) bid-asks
  • “serverless” with ephemeral matching with-in Redis-like in-memory data structure store, used as a database, cache and message broker.
  • ephemeral bid-ask data, only data “owned” is history of matches.
  • discrete time, batch process (i.e. events) following  Eric Budish’s work on continuous time design flaw in  HFT platforms 
  • third party AI bid bots
  • third party custodial services
  • settlement a function of DTL layer

Companies with pub-sub platforms

  • Satori (formerly MZ)
  • Facebook (WhatsApp)
  • TenCent (WeChat)
  • Google (Cloud Pub/Sub)

Some relevant URLs

Gabe Leydon, CEO Satori (MZ) TokenPost Interview During Korea Blockchain Open Forum,  July, 2018 https://www.youtube.com/watch?

Satori’s “AI Mesh network” transaction layer  stats — 500 Million “messages” per second or 1 million publishers sending 100 bytes a second 

Hadera Hashgraph’s DLT stats — 500,000 transactions per second with 100% consensus based on a “gossip of gossip protocol” and a consensus latency of 3.5 seconds.

Eric Budish, The Design of Financial Exchange, Some Open Questions at the Intersection of Econ and CS.  Simons Institute of Computing UCB, November 2015 https://www.youtube.com/watch?v=Rilv2AJ1TWM

Eric Budish, “Will the Market Fix the Market?”, AEA/AFA Joint Luncheon Talk, January 2017 https://www.aeaweb.org/webcasts/2017/luncheon

Albert “Pete” Kyle, “Continuous Auctions and Inside Trading”, Econometrica, November 1985   https://www.rhsmith.umd.edu/files/Documents/Centers/CFP/research/kyle1985.pdf

Albert “Pete” Kyle, “The Changing Nature of Trading Markets”, U of Maryland Conference,  May 2017 https://www.rhsmith.umd.edu/files/Documents/Centers/CFP/2017/kyle.pdf

Fisher Black, Toward A Fully Automatic Stock Exchange, 1971  http://17mj9yvb9fl2p5m872gtgax5.wpengine.netdna-cdn.com/wp-content/uploads/2017/07/Towards-a-fully-automated-stock-exhchange-part-1.pdf

 


An Outline of an Decentralized Alternative to the Order Book

In a crypto-economic trading platform:

  • “The network becomes the exchange”
  • Snapchat (ephemeral) bid-asks
  • User-defined smart contracts

The order book is a market design for the exchange of goods and assets. It dates back to the European coffee houses of the late 1600s.  In London, Jonathan’s Coffee House was a significant meeting place for traders in London in the 1700s. It later became the site of the first London Stock Exchange.

In the late 1700s, in what later became known as New York City, Dutch traders met at a Buttonwood tree in lower Manhattan island to buy and sell goods.   Now known as Wall Street, this location became the center of financial asset exchange in the United States.

Until the 1970s, stock exchanges were characterized by a market design involving traders gathering around pits with specialists manually matching bids and asks in paper order books (see below).

The great financial economist Fisher Black wrote a prophetic article in 1971 called “Toward A Fully Automatic Stock Exchange”   where he laid out the implications of the coming automation of the manual order book.  He speculated on what the computerization of the order book would mean for bidding mechanisms, liquidity and overall stock market efficiency.

Screenshot of Bid-Ask Order Book of Poloniex

Market design, indeed all design related to computers, is coupled tightly to the computer technology itself.  Just because one design is associated with a particular computer technology does not mean that the same design should be mindlessly carried over when the computer technology changes.

We recall the mindless carry over of the 80 character line limit established by IBM for punch cards in the 1920s to cathode ray tube (CRT) terminals in the 1970s.

There is a whole host of other instances of mindless carry over of design when the technology changes.  One notable example is the organization of the factory floor after the conversion of machine power from a centralized shaft driven by water to decentralized electric power.

In the last several years, there has emerged a new decentralized, serverless, peer-to-peer (p2p) paradigm in computer architecture propelled by several trends: Internet of Things (IoT), autonomous vehicle-to device communication (V2X), and crypto.

This technological change demands a rethinking of the appropriateness of the centralized client-server order book market design as the core of a transaction layer in a crypto-economic platform.

The trend away from client server architecture is driven by a need to do more raw compute “at the edge” before sending data to the server for storage and higher order analytics.  This is known as “edge computing.”  The use cases for edge computing are Internet of Things (IoT) and autonomous vehicle-to-device (V2X) communication.

The trend away from client server architecture is also driven by the tremendous interest in Bitcoin, Blockchain and Ethereum.  Interest in crypto could be the start of a paradigm shift away from client server financial intermediaries earning opaque rents and toward decentralized, trustless p2p protocols for validating and accounting for the exchange of financial assets.

A true decentralized crypto-economy involves not only a DLT layer but also a high speed transaction layer. 

The thesis of this paper is that the time is now to consider the possibility of pairing a transaction layer with a true decentralized market design with a decentralized distributed ledger technology (DLT).

We believe that publish-subscribe  currently is the leading protocol for the transaction layer as it has already been deployed at scale an the platform behind several MMO games (from MZ) and chat platforms (WhatApp from Facebook, WeChat from TenCent).

We believe that MZ’s recently spun-off subsidiary Satori is leading the integration of a pub-sub transaction layer with a DLT called Hedera Hashgraph. The question is what will be the market design for the transaction layer?

Some URLs relevant to Satori’s plans:

Gabe Leydon, CEO Satori, TokenPost Interview During Korean Blockchain Open Forum, July 2018

Gabe Leydon, CEO Satori (MZ) Fireside Chat Crypto Invest Summit, May 2018

CEO Gabe Laydon leaves MZ to focus on crypto — Venturebeat June 1, 2018

Gabe Leydon video at Hedera Hashgraph NY announcement April 18, 2018

Satori’s “AI Mesh network” transaction layer  stats — 500 Million “messages” per second or 1 million publishers sending 100 bytes a second 

Hedera Hashgraph’s DLT stats — 500,000 transactions per second with 100% consensus based on a “gossip of gossip protocol” and a consensus latency of a 3.5 seconds.

In a crypto-economic trading platform:

  • “The network becomes the exchange”
  • Snapchat (ephemeral) bid-asks
  • User-defined smart contracts

Value Proposition:

    • user-defined contracts ( e.g. options with odd expiration dates, long-short pairs, straddles)
    • tokens earned by peers supplying liquidity spread contracts
  • elimination of latency rents going to HFT and server co-location fees going to exchange
  • elimination of “data ownership” rents earned by exchange

Specification suggestions:

  • high frequency, many-to-many, pub-sub protocol
  • messages in form of  Myerson “take it or leave it” (TIOLI) bid-asks
  • “serverless” with ephemeral matching with-in Redis-like in-memory data structure store, used as a database, cache and message broker.
  • ephemeral bid-ask data, only data “owned” is history of matches.
  • discrete time, batch process (i.e. events) following  Eric Budish’s work on continuous time design flaw in  HFT platforms 
  • third party AI bid bots
  • third party custodial services
  • settlement a function of DTL layer

Companies with pub-sub platforms

  • Satori (formerly MZ)
  • Facebook (WhatsApp)
  • TenCent (WeChat)
  • Google (Cloud Pub/Sub)

Register with the SEC as an ATS or ECN not an exchange.

Targets — continuous time order-processing client-server exchanges with massive multi-million dollar rents going to server owners and HFT snipers.

  • Pseudo-crypto DEX with client server order books
  • FOREX with tokenized fiat money
  • Swaps
  • Options
  • Dark Pools
  • Replace “book-maker” gambling with p2p gambling

Abrams tweets on the need for decentralized market design as part of a true decentralized crypto-economics transaction layer


MZ (Machine Zone) and Its Satori Platform

Satori® – Towards a P2P Crypto-Economic Platform

 

Towards A Crypto-Economic Market Design: Discrete-Time, High Frequency, P2P

 

Machine Zone (MZ): A $10 Billion Dollar Unicorn in the Making

 

Edge Computing Use Cases for MZ’s (Machine Zone) Platform

Machine Zone and The Perversity of Unicorn Lists

 

Machine Zone (MZ): A $4 Billion Unicorn That Walks the Walk

 

Machine Zone: IPO or What?


An Idea For A Millennials Investment Vehicle: A Big Tech HQ2 REIT

There have been a number of recent surveys asking millennials with substantial cash savings — predominantly young professions in tech and creative positions — what kinds of investments are they interested in.  

As if they were disciples of the late great fund manager Peter Lynch, whom they probably never heard of,  they say the are interested in investing in what they use and understand.

Plus, the added benefit of such investments is being able to talk about them to friends who are familiar with the names.  Really, how fun it talking about how great your S&P 500 index fund is doing?

The Peter Lynch approach to investing is wise in some ways, but foolish in other ways as it tends toward undiversified, trendy, high risk investments as opposed to diversified, value-based investments.

At the top of the list of investments of interest to millenials is own home ownership.  Next comes stocks in the big tech companies they use and understand: Apple, Facebook, Apple, Amazon, and Google.  Next comes smaller, consumer-facing tech companies like Tesla, Netflix, and Snapchat.

And within the last two months, cryptocurrencies have captured their interest.

But, with the bust of crypto and the dim prospect of ever saving enough for a down payment on a “starter” home of $1+ Million in tech heavy areas like the San Francisco Bay Area,  there is an opportunity to come up with new investment vehicles  composed of a diversified portfolio of assets that millennials use and understand.

One recent innovation is something called an eREIT  (electronic Real Estate Investment Trust) like Fundrise — a trendy looking online website for investing as little as $1,000 in a professionally managed portfolio of property REITs.  

But there are multiple problems with eREITs.  This includes a double layer of fees charged by the managers of the eREIT on top of the fees charged by  individual REITs.

It also includes evidence that long term rates of returns (ROI) on actively managed real estate REITs are less than ROIs on low fee, passively managed S&P 500 index funds.

As an alternative to eREITs, we would like to propose a new straight-up REIT that both should appeals to millenials and should outperform existing REITs.  Obviously, the increased expected ROI comes with the increase risk as of a concentrated portfolio of properties concentrated in about 8 metropolitan areas.

We call this new millenial investment vehicle an HQ2 REIT.

We identify below 8 metropolitan areas  as most likely to be named a future location of  secondary headquarters — know as HQ2 — of big tech companies.

The includes the already announced intent of Amazon to name one city out of 20 finalists for its HQ2 in 2018 plus Apple’s recent announcement that it has plans for its own smaller HQ2.   

While unannounced,  it is highly likely that Google and Microsoft will also need to plan for an HQ2 in the next 5 years.    Assuming that it is unlikely that the four companies — Amazon, Apple, Google, and Microsoft — will pick the same metropolitan area, this means that 50% of our 8 most likely choices for an HQ2 will actually get an HQ2.

In terms of arriving at this list, we start with Amazon’s recently narrowed down list of 20 metropolitan areas in the running for its HQ2 that is projected to employ ultimately around 50,000 people.    

We next apply a Business Insider assessment of the likelihood (a simple linear ranking 1-20)  of each city being chosen.  We also make an additional division into two group based on median housing prices and proximity to a University with a top 20 Graduate School Computer Science Department in Artificial Intelligence   

Sources:

Business Insider Ranking of Finalists for Amazon’s HQ2

Median Home Prices in Top Metro Areas — 2015

US News Ranking of Graduate AI Departments

Here is the more extended version of list