Reason for gap between buys and sells?

Why is there such a wide gap between buy and sell orders? Most markets that I am familiar with have a very small gap, unless there are highly illiquid, meaning that there are only a few orders. But this market has dozens, or even hundreds, of orders and players making offers. It seems like that should be enough liquidity that we would see the gap close.

Over the past 24 hours the chart on the Lindex page very plainly shows two lines, typically about 15 L$ apart, about 3 to 4 percent. Although there happens to be some slight closing of the gap visible, it doesn't look about to close.

Here is what should happen. Suppose I am about to buy. I could either buy at the best sell price, or else I could post a bid that is higher than any outstanding bids. Doing the latter will still get me quick execution, as soon as the next person tries to sell. And I get several percent more for my money. The same reasoning happens in reverse for sellers. Why would they take the best bid when they can simply undercut the lowest seller and get more money with only a slight delay? This effect should close the gap to where the highest buy offer and the lowest sell offer are almost the same. That is what I would have predicted would happen.

Yet for some reason it's not happening, we see these two lines showing prices, with a stubborn gap between them. This essentially never happens with a liquid financial market like stocks or commodities.

Is there some reason relating to the detailed structure of the Lindex market that is causing inefficiency and preventing this expected effect? Is it the fee that you pay when L$ change hands? Is it the user interface, that forces most people into the disadvantageous strategy of accepting the best offer instead of making one of their own? Is it perhaps that many buyers and sellers cannot afford to wait a few minutes or an hour or two for their trade to complete, and have to take that 3-4% hit in order to complete it right away?

Or maybe the market is still immature, the buy orders have only been in place for a few days, and the gap will close eventually?

I see the gap too, and I have an idea why it stays there.

The people using the Limit Buy are mainly speculators. Most people are buying currency via Market Buy, usually through the client when out shopping in world. You don't see those people because they're not using the website to issue open orders, and they're the ones doing most of the buying. They're not speculating the currency, rather they are good consumers buying currency in order to purchase inworld products and services.

The speculators with Limit Buy are gouging the unwary who accidently use Market Sell to cash out their lindens, then are putting their money back on the exchange at a lower rate to be bought up by the usual currency buyers who buy Linden through the client, while out shopping. And yes, I think these folks are mostly vermin, who don't add a damn thing to the economy, only profit from the work of others mistakes.

There's my speculation as to why the gap remains for so long (too long) and the associated plunge after implementing the new Lindex system. Take care.

The reason for the gap is the %3.5 per sale and $0.30US per buy orders. $13L is the smallest spread between the buy and sell orders where a buy/sell rder will not loose money (i.e. selling $100,000l for 331, then buying them for $344, will make you $180L. If you raise the sell by $1l, or drop the buy by $1l, you'll be out about $100l). The gap is basically reflecting the large fees involved in selling and buying on the market. This large gap doesn't really influence casual ingame buyers of curency, though, since the spread only heavilly affects huge transactions. If someone was needing to buy $10Us worth of $L, they could get $3,210 right away, or $3,338 if they were willing to wait a few hours and hope no one undercuts them. Not much of a loss, considering the work and risk required to actually get a buy order filled. Same for sell orders. $5,000l could sell for either $14.03US or $14.57US. You're essentially loosing about $0.50US for the privilige of having someone else watch and price the market for you (and putting up a large sum of their own earned money into the market as an offer), instead of having to undercut someone else (which would also get you a bit less), and hope that it sells in a few hours without someone else undercutting. I think $0.50 is a pretty tiny fee to pay someone who is willing to keep large sums of their own money on the market, who is also actually doing work keeping track of the market after taking the time to learn how the market works. Besides, the $0.50 fee mostly goes to LL, too, not to the day traders.

I think it is a little bit of all of those.

Mainly, I think it is the fact that the vast majority of $L purchases are made by people who want some $L to make a IW purchase. These people do not care about currency speculation, or the fact that they can save 4% and be forced to wait. They want their <insert item here> right now.

At the same time, I suspect the vast majority of people that place buy orders are currency speculators. They need greater than that spread to profit. LL takes their cut, and with the devaluing $L it's risky even at a 5% spread.

The reason for the gap is the %3.5 per sale and $0.30US per buy orders. $13L is the smallest spread between the buy and sell orders where a buy/sell rder will not loose money (i.e. selling $100,000l for 331, then buying them for $344, will make you $180L. If you raise the sell by $1l, or drop the buy by $1l, you'll be out about $100l). The gap is basically reflecting the large fees involved in selling and buying on the market. This large gap doesn't really influence casual ingame buyers of curency, though, since the spread only heavilly affects huge transactions. If someone was needing to buy $10Us worth of $L, they could get $3,210 right away, or $3,338 if they were willing to wait a few hours and hope no one undercuts them. Not much of a loss, considering the work and risk required to actually get a buy order filled. Same for sell orders. $5,000l could sell for either $14.03US or $14.57US. You're essentially loosing about $0.50US for the privilige of having someone else watch and price the market for you (and putting up a large sum of their own earned money into the market as an offer), instead of having to undercut someone else (which would also get you a bit less), and hope that it sells in a few hours without someone else undercutting. I think $0.50 is a pretty tiny fee to pay someone who is willing to keep large sums of their own money on the market, who is also actually doing work keeping track of the market after taking the time to learn how the market works. Besides, the $0.50 fee mostly goes to LL, too, not to the day traders.

Thanks, those explanations make sense, particularly the motivation for buyers who are trading on the spread.

It seems like there is still one question, though. Why do transactions ever occur at the "buy" (or "bid" price? When you look at the chart of "Trades in the Past 24 Hours" there are two lines visible. I can understand that many buyers are impatient, they want their L$ to buy something, so they take the market price. This will be the best seller's offer, and corresponds to the lower line on the chart.

But there is also an upper line visible, corresponding to the buyers' offers. Apparently these would be caused by sellers who are selling at the market price and accepting the best outstanding buy offer. It's harder for me to understand why a seller would be so motivated to complete his sale that he would give up L$18 (the current spread). Does he really need the money right away? Is his loan shark about to break his knees if he doesn't pay off his gambling debts or something?

I mean, I realize that people need money, but I'm surprised that SL players get into a situation where they'd need to cash out right away. I would think that SL business people would take a little longer view of things. Giving up 3 or 4 percent just to get your money a couple of hours earlier is a pretty questionable strategy.

If sellers would stop taking these "sucker" bids, then the whole strategy of making money by trading on the spread would stop working, and all those low-ball buy offers would disappear (or at least, would play no role in the game). Buyers and sellers would pretty much agree on a single price, and we would no longer see the bimodal (two peaked) distribution of trade prices which is such an unusual feature of this market.

I find this to be a very interesting topic, especially after having made two Limit Buy orders.

Not for the purpose of trading, or turning the currency back for a greater rate. Rather, just to test the market and its function.

When doing so, it shows a list of what APPEAR to be....ie. (should) be....currently OPEN Sell orders, and the rate they are set at. Also, currently OPEN Buy orders are also listed.... in theory, just waiting for somoene to be matched up who is willing to either buy or sell at that matching rate.

Wanting to further undersand what the red markers were at the top and bottom of the daily trading...were, I thought, the high and low trades for the day.

So, made a Limit Buy order to purchase XLinden at 300/1 . There were plenty of OPEN sell orders at that rate. I should have been matched with the seller, and given my Lindens. Instead......even though I was willing to pay to recieve only 300/1.....I was actually given 320/1. When I asked about this, LL said that I was willing to accept no LESS than 300 USD, and that my rate of 320 Lindens met that criteria. That is true....

However,

What I do not understand is what happend to everyone that had "open" sell orders between 300 and 320 ! There are people out there who would LOVE to sell their Lindens at a rate of 300 to 320 right now, and yet, it seems they are bypassed somehow...


Now...after a few days, just to make sure this was not an accident of some kind....I checked the open SELL orders again...saw that there were in fact present...and waiting to be sold at 300. 301, 302, etc.....

and I purchased more Lindens....at 300/1 this time....the transaction was closed at 319/1.


So....someone see if they can explain what I am missing here. I am not trying to cash in or get rich at all. In fact, to test the system I am TRYING to "lose" money....but I keep getting more than what I am asking for.

I guess if it is me making a mistake somehow, stupidity is doing me good at the moment....<grin>

because the price is falling, no buyer is willing to take the chance of buying at the current selling price, only to see the dollar slide a few more notches. it will take time for the buyers and sellers to narrow the gap. when that happens, the linden dollar value will likely stabilize.

If no buy orders were getting filled, then people who need to sell RIGHT NOW would just keep undercutting each other until the sell orders match the buy orders (making the $L loose another $15 worth or so). Also, placing your L$ in the sell order does not guarantee a sell, especially if the $L is loosing value. You may put your $L for sale at the curent best price (without undercutting), but if enough people undercut you, your $L may never sell.

you are correct 100% rasah. buy and sell bids will narrow the spread, but that only happens when equilibrium in the market is reached. as long as sellers out number buyers, the L$ will fall.

That's a good point about the falling value of the L$ making sellers afraid of being undercut and not getting their orders filled. That could be a reason for them accepting standing buy orders, even at a substantial penalty. But there are two arguments against it (that is, arguments against sellers doing this).

First, the Linden is not falling all *that* fast. Just refreshed my browser, and the spread is L$16 right now. But look at the chart of the last 24 hours. It's flat. As a seller, you don't need to accept a loss of L$16 per dollar sold, just to insulate yourself against the falling Linden. You could go down a L$ or two and be safe. You'd do several percent better on the sell.

And second, many more buyers than sellers are placing market orders. You can see this on the chart because the lower line is much darker than the upper line. The lower line represents the more expensive L$ and are the offers of the sellers which are accepted. As noted above, this happens automatically when players buy Lindens from inside the game, a common practice. By placing a sell order at the bottom of the range of sells, a seller can have good confidence that his order will be executed soon.

It's true in general that in financial markets, when they are moving fast, or are unusually volatile, there will be a larger gap between the buys and sells. But the Linden price is not too extreme compared to many other markets. It still looks to me like the Linden market has not fully adapted to the introduction of standing buy orders and is showing some artifacts of poor trading strategies. Once players get more experience with the market I would predict that the gap would narrow.

Does anyone keep longer-term records of market prices than the 24 hours shown on the Lindex page? It would be interesting to look back in the days after the buy orders were introduced and see if the gap was different at that time.

the l$ has fallen 16% in two months. that is *fast* in anybody's book.

I beleive this is do to the fact that people have their "Currency Exchange Settings" set to Basic. When set to Basic they only have an option to do a "Market Sell" and not a "Limit Sell". So they end up selling at the best buying rate. I could be wrong, but it would seem to make sense.

TT

L$61,596,556 (New Currency Printed)
L$19,974,323 (Sinks)
==========================
L$41,622,233 (Money Supply Increase since May 1st, 2006)



L$41,622,233 (L$ Increase) / L$681,211,519 (Money Supply) = 6.11% Increase

You are %100 correct as well. The buy orders just serve to slow down the fall a bit. To those who may think otherwise in regards to the HUGE drop in the last two weeks, the fall started about a week before buy orders were implemented.

Just to reiterate, a spread of $13L between buy and sell (i.e. between $330 and $343) is the minimum that could still have a profit with the %3.5 and $0.30 fees, only making you about $100L on a $100,000 trade. Increase in $1L increases profits by about $100L to $200L. And you could get about $200 to $500 on investments elsewhere, so unless the spread gives ou at least $1,000 (about $16L difference) it's not really worth it.
Other big thing is that most of the buy orders are done by traders, AND there's also one huge problem: people are only given a $2,000USD buy and sell limit for every 30 days. I have filled up my quote on two accounts within 3 days for each. i.e. people who are trading and are offering up their $USD to buy $L are running out of trading allowance, leaving just the people with insanely crappy buy orders on the board. Hopefully LL will remedy this soon.

That's true, Rasah, but then there is no guarantee that it will always be possible to make a profit by simply offering buys and sells on the same day! In fact I would say that in most markets this is not possible. You can't get rich by buying and selling IBM stock at the same time, or ounces of gold. There's no inherent reason why it should be possible to do this with L$ trading, and in fact I would predict that this opportunity will soon disappear. It represents an inefficiency in the market which I would expect traders to soon recognize and correct.

Specifically, sellers will come to realize they don't need to take a L$18 hit on their sales by accepting such low buy offers; and in return, buyers will begin to offer higher offers in order to get a better price than the best seller offer. These factors will cause the buy and sell offers to converge. It happens in other markets, and I see no reason it can't happen here.

BTW, a drop of 16% in two months doesn't represent unprecedented volatility. Financial markets move this much routinely and have small gaps. Palladium futures fell 9% in one day on May 15, and zinc fell 11%. Compared to these, the Linden is not excessively volatile.

It's not volatile. It's mean reverting. Big difference.

It's quite simple. The gap is because of the 'costs' (3.5% in this case) on selling L$. Plain and simple, end of story, you don't need to speculate on reasons... that's it!

And... it has. I'm down to one buy/sell if I'm lucky. Most of the days the spread is so small that you set up a sell overnight, hoping it hits by morning, and set up a buy, overcutting someone by $1 to $3L (not under, over), just to make about $500L to $1000L off a $300USD trade by day's end (which is NOT THAT MUCH to those yelling ZOMG, they're rich and are ripping us off). And I'm on my last allowable trade before my backup alt hits his $2000USD limit. I just hope there are enough other traders out there to keep the buy orders from dissapearing and going into the ridiculous ranges.