THE SUGGESTION Somebody needs to create an electronic exchange for e-gold that works like the electronic stock exchanges, such as the Island ECN. THE REWARDS 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. STOCK EXCHANGE PROVIDES PRICE DISCOVERY EFFICIENCY 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. CURRENT LACK OF PRICE DISCOVERY EFFICIENCY WITH E-GOLD 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 that. DELAY AND KNOWLEDGE OF CLEARING PRICE 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. BROKER ACCOUNTS 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. THE EXCHANGE 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: http://www.isld.com 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. THE BID / ASK SPREAD 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. ADVANTAGE OF BEING FIRST 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 eBay.com 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. PROFITS 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. WHAT IT WOULD DO FOR E-GOLD 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 $$ back and forth. WHO WILL DO IT? Standard Reserve may presently in the best position to create such an exchange, because they already have combined $$ / 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 http://two-cents-worth.com/?263239&[EMAIL PROTECTED] --- You are currently subscribed to e-gold-list as: archive@jab.org To unsubscribe send a blank email to [EMAIL PROTECTED]
