The process absolutely works both ways. Arbitrage does not drag the price down or up. Its sole function is to correct inefficiencies in the wider market by tying various markets for the same asset together. An arb trader simply finds traders on one market and connects them to another market where they could have themselves bought or sold and got a better price if they knew better or were willing to go through the trouble(sometimes involving 2 or 3 other assets). For example if the price on poloniex STEEM shoots up, that price does not reflect the full market because not all orders/traders are on poloniex. The buy orders must fist reconcile with all the other markets where traders are selling STEEM either for BTC or SBD, or any other asset. The arb trader simply makes those connections. Arbitrage does not effect the real price, it helps to equalize the price across all markets to establish and find the real market price, where all traders are accounted for. Only when there is no arb opportunities left can you say you have the real market price.
You've likely been seeing this one way action because that is simply the direction the market has been going. There is a good deal of sell pressure from STEEM that needs to work its way out of the system through both STEEM/BTC and STEEM/SBD/BTC.
Anyone buying SBD and then converting using the SBD 7 day settlement function is not technically doing arbitrage. They are speculating and risking capital on a bet that after 7 days the price of steem will be to their advantage. All markets are subject to this type of speculation.
There is no speculation in arbitrage. I hope this makes sense : )
http://www.zerohedge.com/article/why-citi-common-crashed-and-why-common-preferred-arb-could-be-next-volkswagen
this is an explanation of how a similar arbitrage/short implosion almost sunk citibank
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also wanted to check to make sure, but convertible note/securities arbitrage is whats widely associated with the "black monday" stock market crash in 1987. SO yeah, it can and does have disasterous effects.
http://www.nytimes.com/1988/04/13/business/economic-scene-soft-case-against-index-arbitrage.html
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That arbitrage was associated with does not necessarily imply that arbitrage caused the crash. See this quote from that article speaking against restriction on arbitrage on the basis of the crash.
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yeah, i did see that. I realize in that case that its unclear whether the arbitrage was the apocaplyse or just the horn.
that said, i shipped 20 steem to you i think you had the best commentary of all the ppl that disagree with me.
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Thanks for the steem. You are an interesting person, @sigmjin. I'm still trying to work you out. You have some insightful points of view, but also seem to attract controversy and heated debates. I try to look through the bravado and point scoring of who is right or wrong and learn more about how steem works and contribute constructively to the conversation where I can.
With regards to the current topic, I think you give a good explanation of how arbitrage works, but I don't (yet) see enough evidence that price movements only go one way. That is a strong claim that goes against my intuition of how arb works and I can not yet why that would be the case. It seems from other posts you mentioned somewhere that a month ago (from just before my time here on steem), the arbitrage was going the other way and it was also coincident with increasing steem prices. To me it seems the internal market lags the external. I think the solution is more volume and arbitrage on the internal exchange not less, to decrease the price difference users experience.
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@brendio I attract controversy here because i don't back down and i don't pander to whales. Mostly thats because 1.im a shithead. But its also because 2.i don't care about money (at least, not in the amounts that someone could make on this site) and 3.im not used to dealing with people who don't know im always right.
It can go both ways, but only when sbd and steem are simultaneously increasing in price (which was the case a month ago)... its basicaly the same as lifting a see saw up from both ends.
Your idea of arb (which is usually correct) is that a buy on the internal market and a sell on the external one would wipe each other out, and have 0 net effect on price. I can prove thats not true even without an arb.
I can prove this works by simply cycling a bunch of money through the internal and external market and using the mechanism discussed to crash the price of steem, which is precisely what i am going to do this weekend.. Since the transactions are so fast, i can most likely do so with 5 or 10K steem.
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I understand there is no speculation in arbitrage, and i was not discussing the 7 day settlement function, i was discussing the internal steem/sbd marketplace.
As to your assertion, yes, arbiters exploiting an arbitrage can absolutely drag the price down artifically. There are many textbook economic examples of this happening. The term for it is arbitrage drag.
It should be obvious that that this drag creates a significant amount of artificial sell pressure on the markets. ANd you don't have to look too hard to see that this artificial pressure almost always wipes out all gains the currency makes.
In a healthy market, the arbitrage would cause the prices to converge somewhere in the middle. But because the internal market is less reactive, the price always goes down to exactly where the internal market started.
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This idea that arbitrage can "exploit" anything is non-sense. Are the bids and asks on the internal market not real? Do the orders not represent an actual individual interest to exchange at a particular price? Should traders avoid markets that offer better prices? Is someone forcing them to sell or buy? Why do you think the internal market is slow to react? is 1.5 seconds too long? There is nothing limiting the internal markets from reacting just as quickly as anywhere else.
What is artificial about it? Do the orders on the book secretly not really want to trade, or secretly want a different price? Why place an order you don't want filled?
This isn't true. It has nothing to do with "health"(whatever that means) and everything to do with volume. A large enough order will always bring all other markets to meet it's price, not the bottom or the middle. The internal market price would easily be exhausted and made inconsequential with a large enough order placed elsewhere and vice-a-versa. Where the price meets is simply a reflection of the relative pressures in each market. It has nothing whatsoever to due with "health"
Steem lacks buy pressure. Plain and simple. I don't think we'll see many people crying about arbitrage "artificially" keeping the price high. Even though it's the same mechanism and process in either direction.
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replying here due to nesting:
YES... thats exactly my point of contention.
What youre saying, that the sell orders on the one exchange and the buy orders on the other negate each other, is absolutely whats supposed to happen. And on bittrex and polinex, for example, it works exactly like that.. thats why theyre not dragging each other down.
But theres something about the internal market that makes it not work the same way. Partt of it is because theyre not really the same trades on the internal market (theyre direct sbd-steem conversions)
That is to say, on the internal market, they must move in opposition to each other, but on the exchanges they can move independently. So for example, on the external market, the price of steem can increase without the price of SBD decreasing, and on the internal market it can't because they trade directly.
TBH, i feel like there is a term for this on the tip of my tounge that i just can't remember. It fucked up the price of silver once too thats why they had to create silver certs.
RIght, so lets say market A is the external market, and market B is the internal market. When price started to go up on the external market, there is always a better price on the internal market. So everyone wants to sell on the external market and buy on the internal market. This will cause the price on "A" to go down until there is no longer a price difference. Which is exactly what im saying is happening.
The thing is, individuals can voluntarily set their own price. Just not in the same currency. So for example, lets say we start at the 2:1 ratio i describe in my post in the internal market. Then the price goes up on the external market. This creates buy pressure for steem on the internal market. So lets say all that buying steem raises the external market price to 2.5:1
That doesnt actually change the bitcoin price of steem.
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This is just a "triangle" arbitrage which has exactly the same results. You would sell steem for BTC, Buy steem for SBD, and Buy SBD for BTC. You are both buying and selling each of the 3 items. Again in all of these examples the orignal buyer could do all of these trades himself to get the best price but he doesn't because he is either too lazy, unwilling, or unable. So the arbitrager does it for him. These are all legitimate markets and you cannot say you know the true price of something until you considered all of them. Thankfully you don't have to consider them. The free market does this on its own. But anyway, the price cannot move up or down until it exhausts the orders on the books for all these markets.
If I have a banana farm and there is some dude who has lots of Steem and loves bananas. We can trade Steem/Bananas until I am out of all my bananas. The fact that he sold them to me in exchange for bananas means there was less selling pressure on Poloniex. This is just to illustrate that every market needs to be considered if your trying to determine the real price. I can also trade Steem for Gold, Steem for silver, Steem for Ethereum etc etc. The fact that these other markets exist is not sabotaging the price of steem. They are all elements necessary in order to determine the real market price.
If i can buy more bananas with the steem I earn from selling them. I will continue to do so until the market price of bananas increases too much from my buying them all, or until the steem i can get from selling bananas is too little to replace the bananas i sold. There are millions of markets like this and they will all effect the ultimate price of steem (and bananas)
Sorry for the somewhat silly examples. It gets complicated to describe pretty quickly and evidently I'm not finding an easy way to say it. : )
Here's one last attempt: If there is a buyer for Steem with USD at $1.50 and he has an infinite amount of USD. If you can buy Steem with $1.40 worth of gold. or $1.30 worth of pumpkins, or $1.35 worth of Ethereum, or $1.38 worth of BTC etc etc... Someone will do all those things and sell the Steem to this infinite USD buyer at $1.50 until the price of steem in gold is $1.50 or more, the price of Steem in pumpkins is $1.50 or more, the price of Steem in Ethereum is $1.50 or more etc etc. This is just the market. How it equalizes. How price discovery works.
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How are you boss? I need to contact you about lending if possible @enki
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I agree. Im not sure what i said that made you think i thought otherwise.
of course not. Like i said, i have nothing against arbiters. It would be absurd not to exploit an arbitrage. But markets that are not as responsive, like the internal market, should not be allowed to drag the price down. And yes, it absolutely is doing so.
Of course they are real. However, the abriters are effectively selling the same X steem over and over again. So for example, lets say there are asks for 20K shares steem. Those asks will all be filled by the same arbiter selling 1000 shares 20 times. The same would be true if there were asks for 100K shares. NO matter what, thearbiters will fill asks by selling the same shares over and over until the sell pressure forces the external market price down to the internal market price.
There are many examples on bittrex and polinex of massive buy volume drivbing the price up, only to be immediately offset by equally massive arbitrage sell pressure setting it back down.
Im not sure if youre intentionally pretending not to understand what im saying, or if im just being unclear (ftr, i'm aware that you do this, so i know you understand what im talking about perfectly well). That said, i do appriciate you coming here and talking about it.. while none of the "powers that be" have done so.
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It makes no difference whether an arb trader connects the markets in a single order or whether he recycles the same steem over and over. I hope this isn't your point of contention. Any selling he's doing in one place, he is buying the same amount somewhere else. The net sell or buy pressure from an arb trader is zero. If he's selling 10k Steem on Bittrex, hes buying 10k steem on Poloniex.
For any order that is being arb'd , it would be the same result if the owner of the original order had simply placed his order on these various markets himself, where the arbiter ultimately does. In fact, he would get a better price but the result is precisely the same as if the arbiter never existed. The only difference is that the Arbiter is doing this action for him and is taking the profit that would have been the savings of the original order had he done it himself.
That is normal and is exactly what should be happening. If the massive orders on an exchange are not enough to also fill the orders on these other exchanges then the price will not move up. The individual buying with massive volume on one exchange would be better off splitting his buy order on to all the different exchanges to get the best prices. If he is lazy, unable, or unwilling to do this. The arbiter will do it for him and profits the difference. But again, the result is the same. The arbiter has zero net affect on the price.
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OK, i want to at least try to find some common ground here...
FOr the sake of argument, humor me and imagine 2 markets, basically offering the same exchange. Lets call them A and B.
Imagine market B has some sort of mechanism that makes it less responsive to buy pressure. Just for the sake of humoring me just assume that it exists... THe market is somehow flawed in such a way that it won't adjust to increased buy volume.
Can you agree with me that if we take it for granted that market B actually has this problem, that market B will drag market A down when an arbtirage exists between the two that makes it profitable to sell on A and buy on B?
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I think anyone buying at market A is foolish because market B evidently will always have the better price.
Market B sellers would also be foolish to continue selling on B when they can get a better price selling on A. But I guess for this hypothetical the sellers on B are forced somehow via this flaw to continue to sell even when they don't want to, or have better options.
What devilry is this!? : )
what is the market without the individuals voluntarily setting their own price. This flaw is pretty wild. I suspect it has to be either the exchange will go insolvent because the displayed books are not representative of the individuals placing their own orders, or there is some mind control device effecting the behavior of these individuals. It could also be a result of a non-free market where access to the different exchanges is restricted or limited, in which case the arbiters are a blessing for those poor soles unable to trade where everyone else can. : )
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