Somebody needs to create an electronic exchange for e-gold that works like
the electronic stock exchanges, such as the Island ECN.

The reward for creating a website like this would be huge profit and
immediate dominance in the e-gold world, and the benefit to everybody else
would be a much narrower spread, and easy, cheap conversion between e-gold
and dollars.  This is a vacuum just waiting for somebody to jump into, and
it has lock in characteristics such that latecomers will have a more
difficult time creating a competing exchange.  There should be an all out
race going on, with no effort spared, to be the first to provide such an
exchange, yet I hear not even a whisper of anybody trying to do this.

Consider the purpose of a stock exchange.  It allows efficient price
discovery, because all bids and asks are represented in the same place.  A
person buys or sells knowing they are getting the absolute best price
available in that moment.  Even in the days before stock exchanges, the
need for a common place to represent bids and asks was so great that
people gathered in crowds to trade stocks by open outcry.

Compare this to the current situation with e-gold.  There is no common
place to represent bids and asks.  It takes a new user such as myself
hours or days to research all the market maker sites to figure out who has
the best bid and ask.  Most people are not going to have the patience for

Then, to make things worse, one has to mail a money order and wait days
for it to clear.  The price at which the transaction will actually take
place is not known, because it depends on the price of gold several days
in the future when the money order clears.  On a stock exchange, I can buy
or sell a stock as many times as I want in a day, and I know immediately
at what price each transaction will clear, because it is decided at the
time the transaction occurs.

In order to trade on a stock exchange, one opens an account with a broker.
 The account can hold both cash and stocks, and may be funded by a deposit
of cash or by a transfer of stocks from another broker.  One can then buy
and sell stocks on the exchange through the broker's account.  The broker
may also provide some banking services to allow using the cash in the
account in convenient ways.  Whoever opens the first e-gold exchange could
provide similar accounts, which hold both e-gold and cash, with banking
services provided for convenient access to the cash.  Standard gold
already has accounts similar to this.  The first such exchange would be
more consolidated than the way the stock market works, because the broker
and the exchange could be the same website, whereas with the stock market
the broker and exchange are separate entities.

Would work just like the Island ECN, where anybody with an account can
have their bid or ask represented directly on the exchange, and all
players can see all bids and asks at any time.  This is the equivalent of
Nasdaq Level 2 quotes.  If you've never checked out the Island ECN book,
go to:
and check out their book viewer during stock market trading hours by
entering the symbol of some heavily traded stock, MSFT for instance. 
You'll see a column of buy orders at decreasing prices and a column of
sell orders at increasing prices.  Each price also has a size associated
with it, which is the number of shares to buy or sell at that price.  The
Island ECN may not be as big as the established exchanges, but it does
allow retail broker customers to bypass market makers and deal directly
with each other.  It is growing all the time, and eventually electronic
exchanges such as Island will most likely replace the old exchange floors.
 An e-gold exchange would work the same way.  Any account holder could
enter an order to sell or buy e-gold on the exchange, limited of course by
the amount of e-gold or cash in the account.  The order could be a limit
order or it could be a market order, the same as in stock exchanges. 
Limit orders outside the current market would be visibly represented on
the book, waiting for fulfillment.  This type of setup would make everyone
a market maker.  Users who are not professional market makers but who want
to buy or sell gold could enter limit orders in the middle of the spread
and wait for another similar user to take the opposite side of the
transaction.  The spread could get pretty darn narrow.  Even the
professional market makers could profitably make much narrower spreads
than they do now.  There would be no wait to know the price the exchange
happened at, like there is now.  There would be no waiting for funds to
clear.  It would just be a bookkeeping entry, noting change of ownership
of e-gold and cash that are in two different accounts on the same site.

In the stock and futures markets, there are many factors that affect the
width of the bid / ask spread, but the two biggest factors are volume and
risk (or volatility).  One way to think of it is that the spread is
determined by risk per turnover period, turnover period being the length
of time it takes a market maker to turnover their inventory.  Volatility
increases the risk per turnover period, and so market makers widen the
spread to protect themselves.  High volume reduces the length of time per
turnover period, so the risk per turnover period is reduced, so market
makers can narrow their spread during a time of high volume.  How would an
e-gold exchange affect this equation?  It would drastically reduce the
turnover period, thus reducing risk per turnover period, thus allowing
market makers to make a narrower spread.  Also by allowing
non-professional users to make their own markets, it would bypass market
makers in many cases making the spread zero.  For others who would like to
be amateur market makers, it would eliminate the barrier to entry and
allow amateurs to compete with the pros with minimal start up costs.  The
vastly increased competition between professional and amateur market
makers would drive the spread to become very narrow.

The nature of an exchange like this is that dominance in the field will be
self-reinforcing once it is established: similar to the way that the auction site's dominance is self-reinforcing.  After eBay, many
others tried to imitate them, but buyers go to eBay because that is where
the sellers are, and sellers go to eBay because that is where the buyers
are.  Competitive exchanges may spring up, and people may perform
arbitrage between them, but whoever is first has a huge advantage.  The
market will prefer to have only one place to go to find price information,
so it will be a major uphill battle for any competitor once the initial
exchange has popular acceptance.

The exchange could charge commission on each trade.  The exchange could
recognize professional market makers by giving them a lower commission. 
Banking service fees could be charged on the cash accounts when they are
used for such things as writing checks or drawn on with a debit card. 
Large account holders and commercial accounts could be given special
discounts on the banking fees as well as the commissions.

It should be obvious.  Standard Reserve has been touting the benefits of
their combined account, trying to sell it to large commercial customers. 
An exchange with broker accounts such as I described would essentially
have all the benefits that standard reserve has been touting with regards
to convenience, but it would also offer an extremely narrow spread for
changing e-gold and $$ back and forth.

Standard Reserve may presently in the best position to create such an
exchange, because they already have combined $$ / SR accounts.  However, I
haven't heard anything about them about creating an exchange.  Anybody
could do it at this stage of the game, with sufficient venture capital. 
I'd prefer to see it done with a 100% gold backed currency, rather than
SR.  Another issue is that it might have to be registered with the CFTC if
it is done in the U.S. and comply with all their regulations.  An offshore
server might be a regulation free place to create an exchange, although
the broker accounts might not be able to offer as much banking convenience
from an offshore server.

~ Vincent Youngs[EMAIL PROTECTED]

You are currently subscribed to e-gold-list as:
To unsubscribe send a blank email to [EMAIL PROTECTED]

Reply via email to