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Polvek Tybor
Independent Galactic Shipyards
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Posted - 2007.01.20 03:02:00 -
[1]
Dear all,
I'm just a humble industrialist who's been plying various trades in Eve for a year or so now.
However, a few weeks ago I woke up one morning with a crazy idea to establish the first galaxy wide futures and options exchange.
So without further delay I'd like to dim the lights and hand over to my stooge EFOE for todays presentation.
Many thanks and please hold your questions for the end.
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EFOE
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Posted - 2007.01.20 03:05:00 -
[2]
I would like to take the opportunity to announce the formation (with your help) of Eve's first and futures and options exchange.
The following post is a request for comments from those that might wish to be a part of or use the services of the exchange. Without the buy-in of the trading public it simply can't happen. That said, here goes!
Purpose
The Eve Futures and Options Exchange (EFOE) will allow the industrialists and financial speculators of the galaxy to enter into enforceable and collateralised futures and options contracts.
Based initially in Jita (with other hubs to follow) the EFOE will provide both exchange and clearing house services which will facilitate the development of futures and options trading galaxy wide.
Every long journey begins with a first step, however, and the first step for EFOE will be the small scale trading of Jita Feb 2.50 Tritanium contracts.
Commodity Futures
A tritanium futures contract is an obligation to buy or sell a set amount of tritanium for a fixed price at a fixed point in the future.
In the case of a Jita Feb 2.50 Tritanium contract that would be the obligation to buy or sell 1 million units of tritanium for 2.50 isk/unit at the end of February in Jita.
It is essentially the same as a trade conducted on the usual 'spot' market. Only here you are not required to transfer the commodity or cash until the agreed settlement date.
Why would I want to that?
There are two major reasons why you might want to use commodity futures: hedging or speculation.
1. An industrialist is worried about a spike in prices. They choose to buy a single Feb 2.50 Tritanium contract to lock in the cost of next months supply. Under the contract they are committed to take delivery of 1 million units of Tritanium at the end of February in return for payment of 2.5m ISK.
2. Alternatively a mining corp may want to lock in a profit on the month's operations at the current high market prices. Therefore the corp chooses to sell 10 Feb 2.50 Tritanium contracts into the market. At the end of February they are committed to supply 10m units of tritanium and will receive 25m ISK as payment.
3. Finally, a suitably daring market trader could believe that current tritanium prices are below their fair value and wants to make a profit out of this opinion. The trader buys 100 Feb 2.5 Tritanium contracts at the start of the month for 200k isk/contact. In the middle of the month the spot price of tritanium has risen and the futures contract price is trading at 500k isk/contact. The trader has no intention to actually take delivery of tritanium and so sells his contracts back to the market and pockets the 30m ISK difference between the buy price and sell price of the futures contract.
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EFOE
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Posted - 2007.01.20 03:06:00 -
[3]
How do I know they will pay up?
On entering into a futures contract both buyer and seller are required to post a æmarginÆ payment (sometimes called a performance bond) with the EFOE. For the tritanium contract the initial margin requirement is 1m ISK per contract.
In the event that someone defaults on their obligation the margin will be confiscated and used to pay off the debt due plus a fine. However, a default is a serious matter and could also lead to a trading ban.
The margin requirement is set so that it will be possible to properly compensate all parties on delivery date. So for example, you have a contract to deliver 1m units of trit in return for 2.50 isk/unit. On settlement day the spot price of trit (see later for a definition) is 2.0 isk. The counterparty refuses to pay the 2.5m isk they owe because they can currently buy at 2.00 instead. In response their margin is confiscated and instead of receiving the 2.5m ISK you get to keep your trit (which you can spot sell for 2m isk) plus receive 500k to make you up to the 2.5m isk you expected plus a further 250k isk (10%) compensation for the hassle of having to sell your trit on the spot market. The EFOE keeps the remaining 250k isk as a fine. Therefore the margin of 1m isk per trade provides suitable discouragement against default and suitable protection for those who might suffer. Should the price of tritanium move so much that there is a risk that the initial margin will be insufficient (by 0.5 isk/unit) then further ævariationÆ margin will be called from those traders with open positions to adequately cover their risk.
Though I hope defaults will be rare the need to calculate a æspotÆ price to work out fair compensation is difficult. At the moment I propose the simplest and æfairestÆ option to be the 7 day mean value of the average daily traded price reported in the market browser. This is a readily observable and reasonable proxy for the actual spot value of trit at any time.
The Role of EFOE
In acting as clearing house the EFOE will be the counterparty to all trades. This has a number of key advantages for market participants.
1. Your credit risk is limited to the EFOE.
2. The EFOE holds margin as collateral for all trades and therefore providing you keep your end of a contract you will not suffer loss due to others.
3. The EFOE will ænetÆ settle trades at the end of the month and will hold only a ænetÆ margin requirement. This means it doesnÆt matter who you choose to buy or sell from. On settlement day you only owe the net amount (buys less sells) of all trades to the EFOE and you must only deposit the margin collateral to the extent of your actual net liability.
Administration
Clearly then the role of the EFOE is to be a trusted counterparty by holding the required amounts of collateral. Really though the significant task is administering the month-end settlement process.
The exchange must track all trades conducted, monitor margin requirements and effect efficient settlement of any outstanding mineral/cash deliveries. The approach I would like to adopt is similar to most other futures exchanges in that trading on the EFOE will be limited to a select number of Principal Brokers (PB).
Each PB will have an account with the EFOE and will be the only people able to conduct trading on the exchange and make use of the clearing house. I initially hope the number of PB to be a maximum of 20 individuals. The simple reason being that beyond this number the administrative burden will become excessive. However, if this proves successful (and lucrative) I hope to introduce an IGB capable trading system which would automate much of the admin and allow for further PB.
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EFOE
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Posted - 2007.01.20 03:07:00 -
[4]
Role of a Principal Broker
If I can convince any of you to actually take part, I hope that the role of a PB could actually be quite lucrative. This role would allow the broker a front row seat in the exchange with direct access to a highly liquid and flexible tool to help with their buying, selling or speculation activities.
However, more importantly the PB will act as the public conduit by which the general citizens of Eve can access the market (at a healthy mark up of course). I expect that PB could either charge fixed fees for arranging deals or otherwise set a healthy margin on the actual price of futures available on the EFOE.
I believe that a limited Principal Broker model will have a number of advantages over a generally open market.
1. Despite the availability of collateral I cannot keep a track of trading, margin positions and fees 23/7. The market will still need a reasonable amount of trust and reliance on the trading members to operate in an orderly manner. That means the PB sending cash without being prompted and settling their obligations in a timely and reliable manner. ThatÆs not to say the EFOE wonÆt ask for margin or remind people of their obligations. Just that I wonÆt have to do so 99% of the time because we are all bought into the benefits of a well run market.
2. A key ingredient to any market is liquidity û that is being able to buy or sell any reasonable quantity for a reasonable price at any time. The best way to achieve this is to have a small number of serious traders through which a large number of trades are being conducted.
3. My boss, Polvek, has a number of other financial interests in the galaxy and doesnÆt want to spend all his time monitoring the positions of hundreds of traders.
Practicalities
So how will the EFOE work in practice. As I said earlier, if this proves successful I intend to implement an IGB capable trading platform that will automate much of the process. While things are getting going though I propose the following:
1. Principal Brokers can agree the size and price of a trade (Feb 2.50 Tritanium only though) anytime and anywhere (chat, forum, vent, whatever). In order to record the trade with the exchange, however, the buyer must send an evemail stating the following to both EFOE and the seller:
Contract: Feb 2.50 Tritanium
Side: Buy
Number: ???
Price: ???
Trade value: Pay ??? ISK
Counterparty: ???
The seller with then reply to the evemail to both EFOE and the buyer with a confirmation in the form of:
Contract: Feb 2.50 Tritanium
Side: Sell
Number:
Price: ???
Trade value: Receive ??? ISK
Counterparty: ???
On receipt of both evemails the trade will be matched and confirmed. The key thing here though is that EFOE can have absolute proof that both counterparties made the trade and can therefore enforce the contract.
2. Both buyer and seller are required to transfer to EFOE their margin requirement plus whatever price they agreed to pay for the contracts plus fees (see later). Note though that the margin is a net requirement so if you are selling contracts you previously bought (or buying contacts previously sold) you are actually reducing your æpositionÆ in the market and you wonÆt need to deposit further collateral.
The amount paid for exchange of the contracts is the æTrade valueÆ and is paid by one trader to the other. The cash will be held by EFOE in each brokerÆs account until repayment is requested. One thing to note is that depending on the spot price of tritanium (around the 2.50 mark) the price could be positive or negative for buys or sells and therefore each party must specify that they expect to pay or receive cash in the trade to avoid confusion.
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EFOE
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Posted - 2007.01.20 03:08:00 -
[5]
3. At downtime on the third Sunday of the month (18 Feb) trading of the contract will cease. The EFOE will send a settlement note to each broker detailing their transactions in the month and their net liability. All contracts must then be settled prior to downtime on the following Sunday (25 Feb) as follows:
a. For net æbuyÆ positions the correct amount of ISK is transferred to EFOE.
b. For net æsellÆ positions an item exchange contract placed in Jita IV û M4 û CNAP for EFOE for zero price (for max duration please).
The EFOE will then transfer ISK or place item exchange contacts as required for collection in Jita IV û M4 û CNAP to complete the trades. The EFOE is happy to accept delivery of cash or minerals at any time prior to settlement date which will be held in the brokers æcustodyÆ account until such time as they are required for settlement. Finally if you have requested a refund of some or all of your margin or trading profits this will also be paid out.
One key point to mention comes from the possibility of default of one of the PB. Firstly the EFOE would make every attempt to reach an amicable solution û especially for a first offence û which would result in eventual delivery and reasonable compensation paid.
Ultimately though if the margin does need to be confiscated and the default was on the sell side then the EFOE is going to be short of minerals to deliver. In this instance the ælossÆ will fall to a randomly assigned broker with a net buy position. I say loss, however, as stated above you will be fully economically compensated plus a further bonus coming from the fine of the defaulter so it wouldnÆt be a complete disaster. You would, however, have ISK rather than minerals.
Is this a scam?
I might as well address this now since it is bound to be raised at some point. I will state categorically and for the record that this is not a scam of any kind (though I suppose they all say that!).
One of the major reasons I enjoy the Eve universe is the realistic and dynamic economics that go on here. Going to the trouble of setting up something as complex and interesting as a futures exchange only to scam a bit of ISK would be truly lame.
However, ultimately we all know that should I really want to I could run off with your hard earned ISK/minerals. I can only really offer the following in retort:
1. I believe that a successful futures (and eventually options) exchange will provide me with a highly lucrative (and frankly very interesting and rewarding) way to earn ISK preferable to the rather cheap method of a simple scam.
2. There is no minimum trading level. You can open as many or as few positions on the market as you wish. That means your level of collateral can be limited to only a few million ISK at any one time û at least until the trust is earned I hope.
3. The highest risk of a scam comes at the point of settlement when I will hold all the cash and minerals due for delivery. If you donÆt like this idea then just close out all your contracts prior to delivery by buying/selling them back to the market . That way EFOE wonÆt owe you anything other than your margin back.
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EFOE
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Posted - 2007.01.20 03:09:00 -
[6]
What does EFOE get out of this?
The exchange will make money by charging a fee for services provided. At this stage I propose to levy a charge of 50k ISK per contact traded (ie, per million units of trit).
Future Development
The immediate goal is to establish a market and some (limited) trading. That way we can develop the rules and norms of the exchange and perfect the settlement process.
In the short term if things go well I would like to introduce an IGB capable trading platform that will do away with evemail and allow automated 23/7 trading.
The automation would allow the introduction of a variety of other contracts for multiple future dates, alternative minerals/goods and other settlement locations (again all benefiting from the availability of net settlement with EFOE).
As the name of the exchange suggests, once futures are working well the introduction of traded option contracts opens up.
My boss, Polvek, has managed to train Accounting 6 over the years and as such intends to present public financial statements prepared under Intergalactic Financial Reporting Standards (IFRS) which could lead to a future IPO. The proceeds of which could be used to establish a large capital base allowing for the reduction of margin requirements and greater default risk being taken by EFOE itself.
What Now
This has been a long post. Thanks for reading. There are likely many questions which need to be raised and solutions to potential problems found. However, if you are an established character (6 months minimum) and would like to help set up EFOE by becoming a Principal Broker then please get in touch.
Any comments or questions are very welcome.
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EFOE
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Posted - 2007.01.20 03:11:00 -
[7]
Reserved
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Treelox
Amarr
Frontier Technologies
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Posted - 2007.01.20 04:01:00 -
[8]
Edited by: Treelox on 20/01/2007 03:57:49
Just a couple of off the cusp brainstorming ideas..
* I think it behoves you to get the IGB part working before you launch. Firstly it adds more credabilty to your operation. Secondly if it catches on like wild fire, your going to have a logistical nightmare without the IGB to help you.
* I see no provisions for reselling of futures. How will this be handled, if at all.
* I dont see any provisions for people to who wish to get out of a futures contract. What happens if they change their mind after they buy a future, but before the call date?
* 30 days is a long time in this game
* Whats to intice people into particapating, when they can easily make more isk buying low in backwater areas, and selling high by moving their mins to high traffic areas?
---
I think its a very intresting idea, its ideas like this that make me enjoy this game so much. Please dont take my comments/suggestions as an attack, but more of Treelox assisted brainstorming. Of course atm, I dont see any reason for myself to particapate in such a system. Maybe I am missing something?
*edited cause i cant spell
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Signature edited - this is your last warning - Jacques |
Daos Leghki
Paxton Industries
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Posted - 2007.01.20 07:47:00 -
[9]
I'm sure you understand this already, but between the 18th and the 25th, you will be holding all of the goods and all of the isk.... that's an awful lot of trust for people to put into you, and your corporation.
Most brokers, like the EGSE, are not time-specific, and the amount of isk the borkers hold is only determined by market forces. In this case, your setup is time-specific and concentrates all that isk into one week. This way, it would be much more lucrative to scam compared to other systems.
It would help you to do a few things, I think. First, have a cycle time of 2 weeks, or even 1. A month is a lot of time, and a month of tritanium is a lot of isk.
Second, you'll want to come up with some method to get people to trust you. Things like an IGB website, a database, many established characters working for you and a business plan all help convince potential customers that you're not out to scam them.
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Martosh Toma
Gallente
Fraction Investment
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Posted - 2007.01.20 08:53:00 -
[10]
How does the clearing house earn isk if everything goes smooth?
Maybe you can use this to reduce scam risk, provided that targeted escrows are still non retracteble.
Although this would tie up a lot of assets in the escrow's
Have anyone issuing a future, be it buy or sell, also set up a item exchange escrow with a isk amount ajusted for the margin amount already payed to the clearing house, with the clearing house as the other party. Then only Allow only these backed futures to be traded...
Maybe such a backed future would not even need a margin amount.
Once trust is gained you can decide to allow some people to issue futures without backing, up to a set budged, but requiring a margin amount.
Hmm, If you would call them options rather than futures then you would be done with your part of enforcing the deals right there as well.
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EFOE
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Posted - 2007.01.20 12:09:00 -
[11]
Thanks very much for the constructive questions. I'll try to answer them as best I can.
Selling Futures & Getting out of a contracts
Every trader starts off with a zero position. Depending on whether they want to buy/sell trit they can buy/sell contracts. You don't need to own a contact already in order to sell one. You are in effect creating one.
If you sell 10 contracts to someone in the market then you have 'short position' in the market which is essentially a bet that the spot price of trit will fall. The reason being that on or near settlement day you could choose to buy the trit cheaply and then sell for more under the contract. If, however, you decide you don't want to actually deliver the trit you close your position by simply buying 10 contracts from the market.
The difference between the price paid to open the position and close it with the other traders will lock in your profit/loss. If the person you are trading with expects trit to be more/less than 2.5 at the end of Feb they will want to charge you for the right to buy at that price.
That is where net settlement becomes useful. It doesn't matter that the buy/sell is with different people. Because EFOE steps in all we see is that you have sold and then repurchased 10 contracts leaving you with no net liability at all.
Any profit made between the price you received for selling and paid for buying will be wired to you.
Risk concentration and settlement
I expect that EFOE will be similar to other commodity exchanges in that physical settlement will be quite rare. The real purpose of an exchange is to allow people to hedge the costs/profits of buying trit on the spot market anywhere in the galaxy.
For instance if you operate in Agil it is unlikely you are going to want to deliver or receive minerals in Jita. However, you can still use the exchange to protect you from price spikes. You would just ensure to sell you contracts back into the market prior to the end of the month. Even if you forgot to do that though the market in Jita is so liquid that any accidental holding could be easily sold.
Therefore the ideal would be that EFOE does not actually do any settlement. The point is though it must always be possible to actually receive the mineral at the end of the day so that the contract value will move in line with the mineral.
Contract Maturity
The contract is for one month because really the point is not about settlement (as mentioned above). Traders can get open or close their position at any point during the month. I picked a month because it is long enough to allow people to trade or plan ahead and not too quick that we constantly need to effect settlement. Maybe 2 weeks would be better though?
Earning Money
The EFOE plans to charge 50k isk per traded contract (2%). That means if you buy 10 contracts at the start of the month you will pay 500k isk fees. If you want to hold onto that and take delivery of the 10m units of trit then no further costs are incurred.
If a week later you no longer want the contracts and sell all 10 back to the market you would incur a further 500k isk charge for the second trade.
If you think this is too high let me know.
Why bother?
Very good question. Futures are more about isk than minerals. People with large pots of cash can use them to speculate. Buyers can use them to protect against price rises and sellers protect against price falls.
In between all of these people you have the brokers and the exchange charging a fee for the benefit - everybody wins.
Why not make them all options
Because only one party to the option has the option. For the option writer it is an obligation. Therefore they are very much like a future only with a small twist. Futures need to work first but options have much more interesting pricing profiles (Black-Scholes model) which makes trading them more interesting and valuable.
Keep the questions coming.
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EFOE
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Posted - 2007.01.20 14:23:00 -
[12]
I've set up eve-futures.com as a placeholder.
I'm not a huge expert in database backed websites though so not sure how long a working system might take. Hence the rather simpler but more obvious evemail confirmation system.
In the short term, however, it would certainly be useful for displaying the size/price of recent trades etc.
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Ferrosa
Gallente
Lyonesse Inc.
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Posted - 2007.01.20 15:19:00 -
[13]
Very interesting idea and very nicely worked out. It seems you have covered almost all the aspects of the business plan and are ready to start on your IGB
If the PB would not have to physically be in Jita (I hate that place), then I would like to propose myself as your first broker 
Evemails will be good for the start, but if it catches on, I wouldn't like to answer/match 50 mails or more per day. It would get lets say, hectic  . Especially with the mail bug and all 
Keep the discussion going, this has potential!
Official broker at the EGSE
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EFOE
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Posted - 2007.01.20 17:42:00 -
[14]
It's certainly not necessary for brokers to be in Jita. As long as you are able to place any item exchange contracts as needed.
Alternatively there is no reason why brokers can't just leave a float of minerals/cash in their custody account at the exchange. That way all settlement would be completely transparent for you - all you'll get is a statement on a regular basis.
Ferrosa, thanks for the support. You're first on the list. Might need a few more though or you'll have no one to trade with  .
I'll set out a quick post later setting out how to calculate margin, fees, trade value etc. in a nice simple way.
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Captain Ferros
Caldari
Expeditionary Fleet 1
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Posted - 2007.01.20 18:06:00 -
[15]
As I read it I must admit im a bit confused about it. SO let me see if I understand this right, using what I as a CEO may need.
You, as the market holder, are the middle man, one who brings together those who need to buy, and those that need to sell.
My corp will need trit in a month, for a carrier being built. We had already calculated that we need 16 million trit, but our budget means we can only afford to pay 1.75 per trit. We then contact you about our want to buy 16 Jita Feb 1.75 contracts.
you search your database, and find that InduCorp has a want to offload 20 million trit at 1.45 each by the end of febuary, due to a bad month and needing to pacify share holders. they have then a want to sell 20 Jita Feb 1.45 contracts.
You contact the both of us, and work the agreement for Inducorp to sell to My Corp 16 Jita Feb 1.60 contracts (inducorp getting more than they expected while My Corp getting them for less than expected, everyone wins)
We then each give you a margin payment which is essentially insuring the contract.
At the end of febuary, My Corp sends you the money for the 16 million trit, while Inducorp delivers to you the trit itself. you then make sure the money/trit goes to who they belong, to include giving back the margin payment (minus a small amount for administrative fees)
If I am correct in this... it sounds like a solid plan.
I reccomend using the "freeform" contract option though to solidify it. That way, if the contract is not completed, you can set it as unsatisfactory conclusion, whihc affects their contract status everywhere, not just with your corp
Basically, you create a contract with all the specific information, and have the buy fee equal to their margin cost.
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Admiral Ferros
Administration
Expeditionary Fleet 1
The New Republic
Damn sacks of wet carbon.... |
Dark Shikari
Caldari
Imperium Technologies
Firmus Ixion
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Posted - 2007.01.20 19:31:00 -
[16]
Do you even need brokers for options on minerals and the like? One can just have a contract set between the buyer and seller.
-[23] Member-
Listen to EVE-Trance Radio! (DSTrance channel ingame) |
Captain Ferros
Caldari
Expeditionary Fleet 1
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Posted - 2007.01.20 19:37:00 -
[17]
true.. but if I read it right, this endeavor is to bring in motivated sellers, and budget concious buyers together.
Its different from placing buy orders on the market, as you are not required to come up with it until the end of the contract period
This means that I could put in an order of 1 mill trit at 2.00 per trit, pay only the margin fee, and not even have the rest of the money at the moment! I got the rest of the month to get it.
Same token, a mining company wants to make sure their stuff will be sold, so they put a sell order of 1 mill trit at 2 per trit... before they even began mining the first asteroid.
Its an interesting theory, and one that may be useful for smaller organizations. (i know plenty of miners who would spend 2 weeks mining straight trit, if they knew they could get a better price than normal for it)
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Admiral Ferros
Administration
Expeditionary Fleet 1
The New Republic
Damn sacks of wet carbon.... |
Dark Shikari
Caldari
Imperium Technologies
Firmus Ixion
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Posted - 2007.01.20 19:53:00 -
[18]
 Originally by: Captain Ferros
true.. but if I read it right, this endeavor is to bring in motivated sellers, and budget concious buyers together.
Its different from placing buy orders on the market, as you are not required to come up with it until the end of the contract period
This means that I could put in an order of 1 mill trit at 2.00 per trit, pay only the margin fee, and not even have the rest of the money at the moment! I got the rest of the month to get it.
Same token, a mining company wants to make sure their stuff will be sold, so they put a sell order of 1 mill trit at 2 per trit... before they even began mining the first asteroid.
Its an interesting theory, and one that may be useful for smaller organizations. (i know plenty of miners who would spend 2 weeks mining straight trit, if they knew they could get a better price than normal for it)
I still don't understand why a broker is needed.
When the option's last day hits, all one side has to do is set up a contract for the other.
-[23] Member-
Listen to EVE-Trance Radio! (DSTrance channel ingame) |
Captain Ferros
Caldari
Expeditionary Fleet 1
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Posted - 2007.01.20 19:55:00 -
[19]
the broker is used to minimize fraud.
Without the broker, I could send money for the trit, and never get it delivered.
With the broker, both sides have to deliver it to him, and if one side fails, they forfit their margin payment.
I dont get stuck with paying for merchendise I never recieved.
Its just a way to ensure that all parties are treated fairly
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Admiral Ferros
Administration
Expeditionary Fleet 1
The New Republic
Damn sacks of wet carbon.... |
EFOE
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Posted - 2007.01.20 20:03:00 -
[20]
Capt Ferros, I think you get where I'm coming from but I want to clarify how trading would actually take place.
At the moment I don't have the technology to run a galaxy wide electronic order book. An order book type market is the one used for spot trades now. You can either place an 'order' or just accept what someone else has already placed. This has advantages but also disadvantages in that the buy/sell spread is often huge and you can't negotiate a deal for large volumes etc.
The EFOE on the other hand will be open outcry trading. This means there is no database or system or whatever. One broker just shouts another one at any time (or all of them if they are in the EFOE chat channel together) and says "I want to sell 10 Feb 2.5 Trit for 200k per contract". If this is a fair price and one of the other brokers want to buy they might say "OK you've got a deal".
They both then send an email to EFOE confirming the details and the trade is confirmed. Then depending on the amount of cash each broker already has held at the exchange (a float of a few million isk would make things much easier) they may have to add more margin to cover the size of their trit position and pay the fee.
Also whichever trader agreed to pay the 200k isk per contract would send (or have deducted from their float) this to the exchange where it is added to the other traders cash float. Brokers can request a full refund of their cash float at any time as long as they don't go below their minimum margin level.
In your example you used different prices in the contract to reflect value of the future. However, the actual price of 2.50 is fixed into the contract and any price around this number is taken into account when the trader agrees a per contract price. The benefit of this is that it is very easy to work out how much cash everyone owes (contracts x 2.5m) and if you choose to sell your contracts you don't have to wait until the end of the month to realise your profit (you can request a repayment from the exchange immediately).
I keep talking about 'position' so I want to be sure you know what I mean. In futures jargon you are either long or short the commodity. If you are long you are going to receive the goods and are generally expecting prices to rise (that's why you want to lock in your price now). If you are short you are going to sell the commodity and you generally expect prices to fall (hence you are locking in your higher sale price now).
However, active traders will want to profit from rises and falls during the month. Say a war is brewing and everyone expects prices to rise. But then a NAP is signed and they fall again. This is where the net position bit comes in. You can buy 10 contracts while prices are rising (and be long 10 contracts). Therefore you need to deposit 10m isk margin. At the top of the market you choose to sell them all. You now have a zero position. You can withdraw all your profits and margin because overall you are completely even. You don't have to deliver or receive anything and can just walk away.
Alternatively, if at the top of the market you want to make a real killing you could sell 20 contracts. Now you will have a short 10 contracts position. You won't have to put up any more than the original 10m isk margin because you overall net position is still 10 - just now you are short rather than long.
Your idea about freeform contracts is a good one. But in order for the exchange to work it needs to be passive. I can't raise contracts for every trade as they happen. Contracts are only used to actually do settlements. It is enough I think that both brokers and EFOE will have proof of all trade details in evemail to start with.
Have I explained things clearly? Any questions please let me know.
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Captain Ferros
Caldari
Expeditionary Fleet 1
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Posted - 2007.01.20 20:16:00 -
[21]
scratches head and tosses out a loose transistor..
ok lets start from the beginning.
10 Feb 2.5 trit contracts for 200k
I understand that to read the following.. 10 contracts to deliver a million trit at 2.5 per trit at the end of febuary... and Im selling for 200k each..
So... if I was a buyer, and I think that the price of trit at the end of febuary would be 3.0 per trit, I would buy a contract, knowing I could pay the 200k+2.5 million (for total of 2.7 million) and turn around and sell it on the market for an even 3 million.
As a seller, im actually thinking the price will drop, so I offer those contracts... and when it is time to deliver, and the price drops to 2, Im selling them at the 2.5, making more profit than I would have on the market.
but if im a seller, and the price does raise, it is cheaper for me to sell to the contract holder for the 2.5, than it is for me to sell it for 3 mill and lose out on my 1 mill margin deposit.
how am I doing so far?
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Admiral Ferros
Administration
Expeditionary Fleet 1
The New Republic
Damn sacks of wet carbon.... |
EFOE
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Posted - 2007.01.20 20:35:00 -
[22]
Originally by: Captain Ferros
but if im a seller, and the price does raise, it is cheaper for me to sell to the contract holder for the 2.5, than it is for me to sell it for 3 mill and lose out on my 1 mill margin deposit.
how am I doing so far?
Real, real close. Your numbers are spot on though - the price of the future today is directly linked to what you expect the spot price of trit to be at the end of Feb. So if the price of trit goes up by 0.20 you can expect the price of the future to go up by about 200k - unless the other traders know something that you don't.
Ultimately though the price is fixed to trit. If one day before settlement the spot price of trit is 3.00 and someone is selling Feb 2.50 Tritanium futures for 300k each then I'm going to buy as many as I possibly can. Because in one day I will have effectively bought 3m isk worth of trit for only 2.8m. That's how you can be sure that the price of a contract is 'fair'.
When you do a trade one person is the buyer and one seller. One thinks the price will go up and the other will go down. It is a bet basically - the size of the bet being the size of your position.
In your case the seller of the contracts was wrong. He would not be happy selling his trit for 2.5 when he can get 3.0 in the spot market. That is why the EFOE is necessary to enforce the contract. The seller MUST deliver that trit in return for 2.50. If they don't they lose their margin and may be banned from trading. Default is NOT an option because someone on the other side might have a net buy position and want those minerals to build something with.
To answer a point of Dark Shikari. The only people allowed to trade on the exchange are the Principal Brokers and no one else. This is to keep the admin down to a reasonable level and make sure that the brokers can have a reasonable level of faith that their fellow brokers won't keep defaulting and leaving them without minerals for their nice new titan.
Everyone else must go through one of the brokers to use the exchange. This creates a kind of distributed trust/marketing/admin burden. Each broker might have say 20 clients that trust him (same corp or whatever). That broker then trades on behalf of everyone else (charging a nice fee / mark-up for their trouble).
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Captain Ferros
Caldari
Expeditionary Fleet 1
|
Posted - 2007.01.20 21:05:00 -
[23]
OOOH... ok so your saying that I, as a client, wont be needing to activly search out the buyers.. instead I tell my Priciple broker "Hey, I need 3 Jita Feb 2.00 Tritanium contracts for no more than 300K each"
The Principle broker goes onto the exchange listens around.
A seller(who is another principle broker) shouts out 10 Jita Feb 2.00 Trit for 200k.
My Principle broker jumps on the deal, reserving 3 contracts. Information is given to the top dog, and each party gives for the margin (unless they already have a credit with EFOE)
End of Febuary, other person delivers the goods to Jita, I deposit money to EFOE... I later on recieve delivery of goods from EFOE, and EFOE transfers the money to the other party.
Help me fine tune my thought on how it works plz lol It is something I am DEFINATEY interested in to help have stable income for DFIB
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Admiral Ferros
Administration
Expeditionary Fleet 1
The New Republic
Damn sacks of wet carbon.... |
EFOE
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Posted - 2007.01.21 00:10:00 -
[24]
You got it Captain Ferros. The only tweak to the plan is that you as a client rather than broker won't be sending money or receiving minerals from the exchange. The exchange is like a private club. If you're not on the list you don't get to play. Brokers can be there on their own behalf (if they are big industrialists or miners) or else intermediaries that act on behalf of several smaller clients.
In the last case keeping track of who owes what to the broker is his responsibility. That way the EFOE only has to keep accounts for the 20 PB rather than 100s of others. It distributes the admin burden to many different parties who can all earn a fee.
So in your example the money/minerals of the client would go though the Principal Broker. The EFOE doesn't know or care who the end client is because we just deal with brokers. This is exactly how many investment banks make revenues. Joe Blow Mining Inc goes through Goldman Sachs to trade his iron ore on the international metal market because Joe Blow doesn't have the size and weight to take front row on an exchange. In return the bank charges a nice fee. Everyone else in the market is much happier dealing with Goldman Sachs than Joe Blow Inc because they are much less likely to default or otherwise screw things up.
If DFIB would like to make some isk by offering smaller clients access to the exchange then that would be great. However, any big industrialists or miners would also make good candidates as PB. Not because they necessarily open the exchange up to other individuals but because they themselves are sufficiently large and make bulk purchases/sales to sit at the exchange themselves and be the other side of deals for your clients.
The key to a liquid market is getting buyers who want to lock in prices. Sellers who also want to lock-in prices and big cash rich funds who are willing to actively trade for profit, take advantage of 'arbitrage' opportunities and grease the wheels for everyone else. I'd love to provisionally put down DFIB in the latter category.
To take it back to your example. The manufacturer needs 10m trit at the end of Feb but they are worried that the prices will continue to rise. So they come to DFIB and say "Can you guarantee me 10m trit at no more than 28m isk at the end of Feb". DFIB goes to the EFOE chat channel, forums or wherever and spies Ferrosa.
Ferrosa opened a 10 contract long position last week when the price of trit was 2.50. It's now 2.70 so he is looking at around a 2m isk profit. But Ferrosa thinks the price won't go any higher and might even fall. He also hates Jita so probably doesn't want to end up with 10m units of trit.
So Ferrosa agrees to sell 10 contracts to DFIB for 250k isk each. You confirm the deal to EFOE and I transfer the 2.5m isk (10 x 250k) from the DFIB account to Ferrosa's account. This closes Ferrosa's position in the market and he heads off to spend his easily won 2.5m profit on spirits and exotic dancers in typical investment banker style.
In the last week of Feb DFIB sends the 25m isk (10 x 2.50) and receives 10m trit. DFIB gives the 10m trit to his client in return for 28m isk.
The client benefits because he bought his trit at the price he wanted. Ferrosa is happy because he made 2.5m isk and didn't have to come to Jita. DFIB is happy because he has a satisfied customer and got to keep the 2.5m difference between what his client was willing to pay and what he could do the deal for on the exchange (with Ferrosa).
And at all times the risk was limited. Ferrosa had a 12.5m exposure to EFOE (10m margin + 2.5m cash profit). DFIB had a max exposure of 25m on settlement day (normally the 10m margin). DFIB and his client had their mutual exposure but that is their business. Oh and EFOE made 1m isk facilitating(50k x 10 contracts x 2 brokers).
As you can see your financial exposure to the EFOE is as small as you want it to be. I'm not asking for billions here. Just enough to hold collateral to protect the traders.
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Fred FourTwenty
Equitus Modular Heavy Industry
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Posted - 2007.01.21 01:31:00 -
[25]
I must say things like this are why I love this game. I think I can help with the IGB / electronic trading system thing. It happens that I was working on a system to allow trading of 'stock options' for a corp I was going to start, long story. Anyway, thing is I may have a good bit of the work already done. If you would be interested in any help please contact me.
Fred
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Captain Ferros
Caldari
Expeditionary Fleet 1
|
Posted - 2007.01.21 02:34:00 -
[26]
Alright. I see much profit in this with me being one of the private club members... though in my case, it will be buying and sellign trit on behalf of my shareholders within the mutual fund.. and having an easilly liquidatable asset such as trit does help keep values up.
Keep me informed, you got my vote
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Admiral Ferros
Administration
Expeditionary Fleet 1
The New Republic
Damn sacks of wet carbon.... |
Shin Ra
BURN EDEN
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Posted - 2007.01.21 11:52:00 -
[27]
I think this is a great idea and will back you. Even if this was a scam, the amount you could potentially steal is quite low initially so its not really anything to worry about.
My only concern is getting enough people on board to make it a worthwhile market. And I really think you should make a site thats IGB compatible to organise it.
Start small and work your way up, I like it.
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Jon Asus
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Posted - 2007.01.21 12:45:00 -
[28]
I'd be willing to act as a trader on the EFOE.
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EFOE
Eve Futures and Options Exchange
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Posted - 2007.01.21 13:04:00 -
[29]
Thanks for the support Shin Ra. I'll add you to the list.
I said previously that I would put up a short note for brokers on calculating margin etc. So here it is:
Position and Margin
On day one everyone starts with a zero position (not buying or selling trit). If you do a trade with another broker you create a position. The easiest way to track this is just to keep a running total on some paper. If you buy 10 contracts you put +10 (cumulative +10). If you sell 5 to someone else you put -5 (cumulative +5). If you sell another 10 you put -10 (cumulative -5) etc. If you want to know the size of you position you just look at the cumulative total (+ve is long, -ve is short but that makes no difference here). Simple really. How much margin is just 1m isk x position.
If you know (and you should keep a track) after conducting a trade that you owe more margin then please wire immediately with the email confirmation. It would probably be beneficial for brokers to keep a small float of cash at the exchange to reduce the amount of to and fro. If you have a positive cash surplus you may request a withdrawal at any time (subject to a reasonable processing delay).
Fees
Even simpler. Every time you buy or sell a contract you will be charged a 50k fee by the exchange. The more you trade the more you pay.
If there is insufficient cash in your account at the exchange to cover the fee please wire over ASAP.
Price & Trade Value
The price of trit is locked in at 2.50/unit in the contract. Therefore if brokers think the price of trit will actually be 2.70/unit at settlement this difference must be taken into account.
The brokers will agree a price for the actual contract itself (the right to buy for 2.50/unit). Given we think the price will be 2.70/unit a reasonable price for the contract would be 200k (if you're not sure why let me know). So when the trade is done one broker will owe 200k isk per contract to the other broker immediatley. This will be done at the exchange by transferring between brokers internal accounts.
Important to remember that contracts could have a negative value (say if trit was selling for 2.30). So you don't always make money by selling contracts - you might have to pay for someone else to take the obligation off your hands. Therefore be careful to specify +ve or -ve prices and state pay/receive in your confirmation evemails.
Again, if you don't have the cash please send it. An important thing to note here is that you don't have to come anywhere near trit. You can just make profits by buying/selling the contracts themselves and profit from movements in the trit price. You only get to touch trit if you happen to have an open position at downtime on the 3rd Sunday of the month.
Actually, this period immediately before trading ceasing could be really interesting as brokers try to end up with the position they want for themselves or their clients and lock in any profits. So maybe we might move this to a more popular time so that brokers can actually be online and get some liquidity?
Open for business
So that's it really. I think we have 3 brokers lined up (more are very welcome at this time).
The EFOE trading pit is open on the EFOE chat channel (if you wish to use it).
I have established custody accounts for any broker who wishes to make a deposit of ISK / Minerals (not required though).
If you do agree a trade (Jita Feb 2.50 Tritanium only though) please remember to notify the EFOE of the trade using the standard evemail template as per my original post.
As we are just starting out here lets keep it small and simple to start with - we are all new to this. That said it could be fun. I will use the IGB site (http://eve-futures.com) to post anonymous information on trade volumes and prices.
I'll follow up with another post on how brokers can price these contracts shortly (or else wiki it).
Thanks alot.
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EFOE
Eve Futures and Options Exchange
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Posted - 2007.01.21 14:25:00 -
[30]
 UPDATE
The Eve Futures and Options Exchange is pleased to announce the appointment of Fred FourTwenty as Chief Technology Officer (CTO).
The exchange has every confidence that Fred will successfully guide the development of the IGB trading system to meet the needs of our brokers.
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