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Why do traders accept black swan risk?

  #6 (permalink)

North Carolina
Trading Experience: Beginner
Platform: NinjaTrader, Tradestation
Favorite Futures: es
Posts: 644 since Nov 2011

Not much interest? Ideas welcome on how it would be possible to create frictionless markets without black swan risk. It looks like Bitmex? has perpetual swaps on Bitcoin. I'm curious if this could work with futures.

There's something peculiar too in futures markets: you can't cross the spread. You can't match in the middle (to my knowledge) or else I don't know of such order type.

One idea with the parimutuel pools betting I've had is you take turns and if done properly this might slow the market down and limit the HFT advantage. Basically you go long or short at the mid point. However, the next tick is determined based on whether more people go long or short. So, if you can predict the market ticks up you will be in profit. This is similar to how the markets trade today except you don't have to pay a premium.

I'd like to see a market structure that:

1. Allows as close to 50/50 betting as possible.
2. Neither advantages larger traders or disadvantage larger traders
3. Minimizes HFT advantage.
4. Does away with advantage for "locals", market makers, and liquidity providers.
5. Prevents black swan risk.
6. Tracks very closely to the underlying market.

I'm thinking all the orders get thrown into a black box. The order type is basically FOK. You won't know if it fills until the next turn.

I'm surprised the CME is not interested in ideas like these. If they would provide the right market microstructure, us retailers could trade a lot more frequently. Maybe its not the primary market but a new product for small traders.

I am thinking that in the past the futures were better trading products because the trade fees were really high. So, the large tick size sorta offset that. But, now you can trade stocks commission free with minimum of spread. Why should someone trade ES when they can trade SPY/ETFs for free? i.e. at places like Robinhood.

One possibility would be a "call-able" future. The way this might work is that say I have $200 for my futures trade. I back it with $200. Someone takes the other side with say $500. And let's say it gets "called". In this case, it will be automatically closed. What about the counter-party though? There trade would get some sort of benefit to exchange or match or reopen without a cost. This is just an a rough idea but makes more sense then taking black swan risk.

Last edited by tpredictor; September 25th, 2017 at 09:15 PM.
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