https://www.marketwatch.com/story/w...-to-warn-of-bitcoin-trading-perils-2017-11-15 Looks like IB will set the margin at 100%... possibly more or restrict shorting futures. "Duffy said CME may institute trading halts at 20% swings in the value of bitcoin to smooth out some of its volatility. Peterffy, however, argues that that might not be sufficient to protect against severe moves within, which aren’t infrequent occurrences in bitcoin trade." Trading halt at 20%... might as well do auction only, you'll end up trading more There's no way that 20% trading halt will work, that will be hit constantly and disrupt trading in the futures. Peterffy has good points....
Hi JackRab, Quoted from the article https://www.marketwatch.com/story/w...-to-warn-of-bitcoin-trading-perils-2017-11-15, “While the buyer (the long side) of a cryptocurrency futures contract or a call option could be required to put up 100% of the value to ensure safety, determining the margin requirement for the seller (the short seller) is impossible,” I don't quite understand which it's hard to determine the margin requirement for the seller. Wouldn't 100% be safe enough for the broker even on the sell side? 100% margin is as good as zero leverage. Why is Mr Peterffy still worried? If Mr Peterffy is really worried, he can always refuse to offer bitcoin futures on IB platform. As a client, it makes me feel less worried too.
Because he understands the way trading in a limited supply asset works. Limited supply means it's easy to squeeze up... and therefore it can go high. There is no exact limit as to how high... since it has no fundamental components to value. It could go to 0.... or 100k. 100% margin means to 0 no losses for the broker to cover a shortfall. But 100% margin and it goes from 10k to 100k... that's a potential liquidation at the top and a loss for the broker of 90k... since the trader only put up 10k (100%). And another problem is that CME will close futures trading during the weekend. While the underlying BTC will trade 24/7. So volatility during the weekend will mean forced covering in futures on Monday open. That's not good either... That's also the problem with short calls vs short puts. Unlimited loss vs limited loss. In a thin market... a squeeze up is more likely than down. And shorts will have to cover/buy back, making it even worse. Even happened with Volkswagen stock in 2008 or '09... went from 200+ to 1000 in mere days.... typical short-squeeze.
Right. I saw his interview on CNBC today and he makes a good point. He wants to see these futures trade on their own independent exchange, that is all. He fully supports the trading of them, just not on the CME. His argument is that a massive margin call on the exchange could lead to a domino effect across every asset class similiar to what happened in 2008. He gave the example of say a guy with a 10k account shorts one future at 7k with full 7k in margin meaning he is paying for 7k in protection. What if this thing trades to 70k over the weekend. That's a 10 bagger. This guy is now into his broker for 63k which of course he will walk away from leaving the exchange on the hook. That's just one small piker. Multiply this times tens of thousands into the 100's of millions. Some traders might be forced to liquidate their bond futures or ES futures to free up margin for the BTC contract on a margin call. Then those liquidations fuel even more liquidations. Then he says, what if trades to 700k? Who knows right? He made the claim the entire financial system could be taken down. The exchange will halt the futures on a 10% move but when the halt comes off there will be no sellers at 7700 because the real coin will be at 70k or 700k or whatever. So the shorts will have no sellers to cover into. This could make the most epic disaster ever. Now, let's go one level deeper. If this were a move in the equity markets, say a stock market selloff, we could rely on the FED to come in and provide liquidity to at least tempter things down. There is no such option here with BTC. The FED will not be able to sell BTC to stabilize the markets. They will be powerless. That will only intensify the fear. I honestly don't know what the solution to this is.
I'll be curious which brokers even allow access to this product. I have a suspicious that they might impose a 100k minimum account value to trade it. Or at least to short it. The long side is not the issue. Here is what will end up happening. The small ET guy will get pissed he can't trade it because of the capital requirements which will create all these bucket shops who will entice them to open accounts in Cypress or wherever and trade some artificial look alike market where they will be scammed out of their deposits. And round and round we go.
Yep... unlimited risk does that... I don't even know how people can arbitrage it properly... influx of funds into unregulated exchanges will be enormous... that's another risk altogether. @Maverick74 what did Peterffy say about an own independent exchange? How does that work or even how is that going to make any difference? The exchange will just go bust instead of brokers/clearing? That sounds a bit like BitMex is geared... independent. They have futures and swaps-style products for crypto, but I also have no clue how they can possibly contain a move of 100%+ within mere seconds...
What is he saying is that this product needs to decouple from the rest of the market so if a fire starts, it doesn't burn the whole world down. You keep the fire contained on one specific exchange away from everything else. If you mix BTC with everything else, the fire will spread, there will be no way to contain the damage. It will contaminate everything and I mean everything. Mr Taleb, you will have your black swan.
It would be something similar to the CFE, the chicago futures exchange that trades the VIX. Have one exchange with its own capitalization requirements, it's own clearing members, and it's own brokers.
That the CME wants to trade the scam is an embarrassment but not a surprise. Peterffy doesn't want to be on the wrong side of the crims manipulating the beanie, when they decide to pull the rug out on a saturday night , dropping it on its head for a 90% loss. Peterffy has money, he can only lose.