Episode 113 ... Benjamin Small (60:02)

Interesting episode ... I know a bit more about Bitcoin now.

Got Ph.D. in Electrical Engineering in 2006
Wall street firms started hiring people like him to automate things
At UBS in spring 2006
"Junior Quantitative Researcher"
Prop trading allowed before Volcker Rule
UBS had huge retail market making operation
Worked on whether to internalize retail order flow or send it to the Street
Algorithm they design makes the decision
UBS, Citadel, KCG biggest buyers of order flow
They want exclusive access to retail order flow
Most retail orders are market order or marketable orders
Any order that's willing to cross the bid ask spread has value
Non-marketable limit orders must be routed to an exchange
Brokers pick an exchange where rebates highest
Beginning 10-15 years ago, desks got more aggressive about maximizing profitability
Equity options orders can't be internalized (illegal)
Trading desks are profitable, so are retail investors getting screwed by them? Tricky question
Off-exchange volume is ~30% of total volume
Worked at Citadel, then Credit Suisse
Built statistical models to improve prop trading desk algorithms for eight years in all
Must constantly tweak, fine-tune models used by desk
Monitoring the algorithms in real time to improve things
Latency is a huge issue in US equity markets
Have to optimize computer code so it's fastest, competitive edge
Memory versus disk versus cache
Worked at IEX, head of quantitative research for one year
IEX had ambitions to become an exchange (now it is one)
One of the inventors of the "Discretionary Peg" order
Tries to predict on client's behalf to switch between inside peg and midpoint peg
Works at Gemini currently, head of market structure
Market structure an interesting combination of microeconomics, statistics, and computer science
Most Bitcoin exchanges have central limit order book
Winklevoss twins founded Gemini a few years ago
Received licensing to trade Bitcoin from New York State Department of Financial Services ~15 months ago
Gemini a fully regulated, licensed Bitcoin exchange
Traditional financial services players could be comfortable with Bitcoin on Gemini
Licensing important because US heavily regulates financial services
Risk and compliance concerns put to rest
Need to make an on-ramp for institutional money into Bitcoin
Need to normalize Bitcoin, just another asset, not a crazy crypto-currency
Evidence that people are seeing Bitcoin as a virtual store of value, not just a speculative thing
More institutions are getting involved in Bitcoin
Majority of Bitcoin trading is by professional Bitcoin market makers
Only 20-25% of stock trading is retail
Bitcoin not too tightly correlated with other asset classes, useful for portfolio managers
Choice of exchange and wallet providers is all important ... your account could be hacked [or Mt. Gox'd]
Many Bitcoin exchanges and wallet providers are not vigilant about security
Can manage your own Bitcoin wallet but if you lose the key, it's lost
Bitcoin trading primitive, only $15BB market cap
Most sophisticated market makers don't want to deal with Bitcoin because it's too small
Think of trading SPY by comparison -- tons of market makers, penny spread, hundreds of millions of notional at both bid and offer at any time
Any aribtrage opportunities in Bitcoin?
Arbitrage across exchanges worldwide ... liquidity, credit risk different by exchange
Statistical arbitrage a profitable strategy by itself
HFT haven't entered Bitcoin ecosystem ... yet
Lots of scams and ponzi schemes in crypto-currencies, just like penny stocks
Why is Bitcoin big in China? Avoiding capital controls and Chinese are natural speculators (gamblers)
There are hundreds of other crypto-currencies, alt-coins
Bitcoin is only five years old, but it's the "core concept"
Ethereum network added a lot of new ideas, help ecosystem evolve, "Ether" is the token
Ether has "smart contracts" -- like a derivative contract but enshrined in computer code, not law
Ether faster than Bitcoin when it comes to settling transactions
Founder of Ethereum is a young Russian kid from east Brooklyn
Bitcoin has first-mover advantage
10 or 20 years from now, could be a much better idea than Bitcoin
Gemini has anti-money-laundering controls
Bitcoin is no scam
Any alt-coin that doesn't have an adequate market cap should be avoided
Look at the source code, all alt-coins are open source, do background research
Lots of oddball alt-coins based on weird ideas
Big laboratory for experimentation
"Shitcoin"
4PM auction at Gemini, match buyers and sellers to get a solid price for the asset, one price
Walrasian equilibrium is the algo they use
Gemini exchange broadcasts forecasted auction price starting at 3:50 PM
Bitcoin will eventually take its place among commodities like gold and oil (he predicts)
Bitcoin has mathematically defined supply, so should become stable store of value [he says hopefully]
Transactions take 30 minutes to clear on the blockchain -- slow!
In future, with instant transfer of value, Bitcoin accepted at point of sale is a possibility
We never touch paper currency anymore, all credit cards and (stored credit cards at) Amazon now
Banks already have full control of your money, no need to be paranoid about it
www.gemini.com
Not on Twitter