Request for (GOM) Short Selling

To Whom it May Concern (ie: Jamie Hale):

Part I: Short Selling
-----------------------
I have a request to allow for GOM traders to Short-Sell SLL blocks on GOM. For those who do not understand Short-Selling, here is a quick Trading 101 blurb:

--
An investor who sells-short, borrows blocks from a player's account and sells them to another buyer. Proceeds from the sale go into the shorter's account. He/She must buy those shares back (cover) at some point in time and return them to the lender.
--

Now Jamie and others might say, "Hell No, the Shorter might not be able to cover, and I'll never get my linden dollars back."

The remedy for this quandry is to force players who wish to short Linden Dollars to put up Linden Dollars into an escrow account and not allow them to short-sell more than what is in that account. So for instance, if I want to short-sell 20/blocks, then my escrow account must have 20/blocks in it. So if I don't cover and the user I borrowed the blocks from exercises their blocks, the blocks in my escrow account at taken.

So for the user who doesn't know their blocks had been shorted, their exercising of there account would flow seemlessly. As for the shorter, they would notice that their escrow account was reduced and be unable to continue any future short sales until their escrow account received a deposit.

Overall, the technicals on how shorting would work aren't that hard to implement on the GOM side. They would just need to create an enviroment where all linden dollars sitting under GOM control was able to be shorted. And to protect the players who's linden dollars are being shorted, the shorter would have to setup an escrow. Not only to protect the players, but to protect GOM from people shorting linden dollars and never covering that sale. An escrow would be a built in safe guard for all parties.

Its just a suggestion, but GOM should grow to support daytrading of Virtual Currencies instead of being a currency clearinghouse for gamers. Thats my 2/cents.

you can't sell something you don't own.

shorting ont he stock market is set up through your brokerage. when you sell short, your brokerage allow you to sell stocks that it holds. it can also force you to rebuy them to replace it's inventory if it's clear you made a bad short.

jamie runs the exchange, not a brokerage.

allowing people to short requires that you can send a creditor to peoples houses for stupid shorting.

shorting will open up this small market to no ends of manipulation. and with 0 down.

if you want to short, go short the USD.

I dont get it. Somebody give me some coffee, its early in the morning.

Here is an informative article on Short Selling, for the financially challenged, or caffeine deprived:
http://en.wikipedia.org/wiki/Shorting

Actually, the remedy is to never implement short sells. The market exists primarily as a means of converting wealth generated in SL to RL funds. Though some people make money solely from the resale of Lindens on the market, like Ace, I don't think this aspect of the market should be emphasized any more than it is now. By transforming the GOM into a full-fledged market, you risk increasing the variability of the market even more. As it is, in-game events predominately affect the health of the market. For example, we're seeing a market contraction resulting from increased land availability. With short sells, you increase the effect which the market has on itself. Prospectors would have even more power to destabilize the market than ever before.

As I've said many times before, if you want to make a profit in a market, invest in something real. This is not something which SL needs to move on to the next stage. Let it remain a simple exchange. Do not muddy the waters.

I keep Alby muted in these forums, since I found that most of his postings are about as valuable and informative as jock itch, so I'm not sure exactly what he said.

But... with that said. Anyone could short sell GOM right now if they wanted. They just need to find someone willing to lend them L$. That's exactly how r/l markets get shorted, with the borrower usually putting up cash or some other asset as collateral.

- Ace

I think you're missing the point. If that's all you want to do then you can use IGE or I will buy your L$ for US$ via paypal. When you're selling on GOM you're selling to other SL users, not a money exchange. For GOM to work effectivly there has to be a countering effect of US$ going into the system as well as out. Using GOM as a proper money market helps this to happen and ensures the 'casual' trader that just wants to 'cash in' is able to do so.

If I wanted to purchase Lindens at an inflated price, I'd use IGE. Besides, if I shouldn't use GOM then why do you suggest that the casual user should? It seems contradictory.

But let me rephrase this in another way: I don't want to see parasites make money off the misfortunes of the market. They did it during the last time of great land scarcity, and they'll do it again if you let them. SL is not about making money. People such as Alby and Blaze seem to think so, but they're wrong. If SL were about making money, there wouldn't be avatars or any of that. We'd all just be looking at GOM and hitting refresh every minute, attempting to wheedle our way to a virtual fortune. SL isn't about that. SL is about creating stuff and deriving profit from that. The profit is secondary to the actual act of creation. Land barons/currency prospectors/etc don't create anything. They are nothing more than maggots crawling upon the corpse of creativity.

I don't buy and sell land, but as I have readily admitted, I do buy and sell L$ on GOM. I'm not sure you would call me a "prospector" since my trading really doesn't care which way the market goes. I just want a big spread between the best buying price and the best selling price.

But with that said, I'd like to explain how what I do (and what my many competitors on GOM do) is beneficial to the market.

Because there are a bunch of us all buying and selling the L$ on GOM, when you go there to either buy or sell, you will find a lot of orders there waiting to be filled. Markets have a term for this called "liquidity". A more liquid market has more buyers and sellers, and helps ensure that there will always be someone there to fill your orders when you do want to use the market. More liquid markets are better markets.

The other thing that me and others like me offer the market is competitition. Because we're always jockeying for position, someone coming to the market can be sure that they are getting the best price.

So... to be called a "maggot" doesn't seem to me to be appropriate. I eek out profits, providing a benefit to the GOM marketplace. I help provide liquidity and competition.

- Ace

A maggot serves to eliminate carrion from the world. It's beneficial in that corpses do not pile up, helping to check the spread of disease. In medicine, maggots are sometimes used to debride wounds. Thus, maggots can be beneficial.

Would it make you feel better if I think of you as a happy little maggot who cleans our wounds, Ace? Can I still think of certain other speculators as disgusting maggots who feast upon festering corpses? I hope this dichotomy isn't too hyopcritical...

Edit: Besides, Ace. You contribute in-world. You don't live solely to generate profit, right? I'd say that leaves you out of maggot-hood.

Whatever floats your boat...

- Ace

Shorting the market is just the ugly step sister of buying in the market. If somebody felt that the L$ was becoming hot, they would buy up Linden Dollars, thus causing the price to rise and making it more expensive to own. Short selling is just the exact opposite, yet people eye it with a bit of distaste because its effect causes the market to decline. But is that really bad? If the valuation of the L$ delines, then players can afford more L$ for less money. So its perplexing why anybody would oppose Short Selling and favor normal buying. A player buying L$100,000 or a Player selling L$100,000 has either a positive or negative effect on the market. The only difference with short selling, is that your borrowing Linden Dollars, selling them on the market, and buying them back at a cheaper price. Then replacing the L$ you borrowed and profiting the difference.

One of the positive effects of short selling is that during a short squeeze, it forces players to buy back the L$ against their will causing prices to rocket upwards. So for the folks who feel an ever increasing L$ is good, then short-players getting squeeze is a God sent.

Wow it sounds interesting! More volume, more liquidity, more more more MMMMMM, More.

what kind of maggot are you ardith?

Every trade in a currency market consists of a "short" and "long". Adding the ability to "short" one currency while requiring an escrow is redundant. Spend some time trading in real currency markets and you'll understand.

AS:

If don't have an escrow, then what would stop a player from short-selling L$100,000 can collecting US$400, having the funs paypal'ed to himself, and never coming back to GOM to cover that short?

As such (smarty pants), you need an escrow account to hold as collateral in case a player makes a short and never covers the amount. It keeps them from running off with the cash. In the real world, your name, credit, etc is on the line. Along with prosecution by the brokerage house to get their money back. But in SL, no sure system exists. As such, you would need escrow accounts for players who wish to short currencies.

BTW: Every trade in the currency market does not consist of a short and a long. To short, you need to borrow a long's assets. But a market can still function with buyers looking to get into a currency with asset holders of that currency looking to sell. Much different than a short borrowing somebody elses assets and selling it.

Interesting... I've never thought of it that way, but that makes sense.

Thnx, Apotheus.

- Ace

I did not mean to come across as cocky or anything in my last post. I am just saying that what I have quoted here is redundant. Just sell the L$ instead of putting them in an escrow to short them. Either way, the sold or escrowed L$ are not available for use by that person.

Also I worded my post incorrectly. Every "position" in a currency market consists of a short and a long position. My saying every "trade" consists of those is slightly inaccurate.

In my own personal experience with currency trading (and it has been awhile) the closest thing I have found to what you are proposing is the ability to "sell short" a foreign currency using my US Dollars; that is, I could effectively purchase US Dollars using Euro that I didn't have. The end effect on my account was that my Euro balance showed negative while my US Dollar balance dropped. Perhaps behind the scenes, this "disappearing money" is going into an escrow, but the situation I am speaking of is backward from what you are proposing (selling L$ using different L$).

I believe it would be neat to be able to "sell short" US Dollars using the Linden Dollars in my GOM account, but I don't expect that functionality to exist anytime soon as there really is no benefit to doing that except to hard-core traders. I also don't believe this would increase liquidity much so there is also no logical business reason for GOM to take the time to write code to make it happen.

in the 1600's in the at the time world-dominating amsterdam markets, people who were found to be short selling (which was considered un-gentlemanly) were hung and/or drawn and quartered.

essentially yer taking a personal loan of stock (at interest) and selling it *NOW* on the bet that when the loan comes due (later) the value will be cheaper, so you can repay the debt. This works fine if the market is in decline, as the loan of 100 shares that 'cost' $10 each could be repaid with 100 shares that cost $8 each, making you a $200 profit.

On the other hand it is also *particularly* nasty as a way to bankrupt people RL because it really is gambling, not investing... you stand to loose *ALOT* of personal money if the price goes up... sometimes absolutely amazing amounts.

aka if in the prior scenario, after the term of the loan the price doubles to $20 per share, you are out, personally $1000. and there is essentially no limit. If somethin amazing happens and the linden soars by say a factor of 2-3 very quickly (say a partnership between LL and a mega-company, or some new land policy by LL etc) people could stand to loose tens of thousands of $US. This only gets compounded with margin, where you essentially take out massive loans to buy/sell stocks.

that could result in some amazingly ugly scenario's and i think honestly you would have to be an utter fool to loan someone the shares to do it. This gets extremely ugly in RL economics, and would be utter foolishness to even attempt in SL where everyone is, to some degree, 'anonymous' (it may also be illegal in many cases without actual government oversight as it is often the domain of some 'unsavory' individuals whom 'unlicensed' brokers turn to, to 'recoup' their loans

personally don't think there's much need for shorting ability, but then that depends on the goals of GOM. The other way to hedge a short position by the way is by purchasing a call option (the right to buy a set number of X at a set price)... but then GOM would have to launch an options market...

If the goal of GOM is just to provide a service for SL gamers, then its a mute point. But GOM makes 3% of the total amount off the seller. Which means that more trading on GOM equals more profits for GOM. So their motivation would be to increase volume. I really wish they would work out deals and get back some other game currencies and allow for inter-currency trading (ie: TBUX/SLL) and such. So instead of Linden Dollars trading against the USD, the SLL could trade against TBUXs.

TBUXs has and/or did have an inflation problem. If there was an TBUX/SLL exchange, then There Players could find a safe haven in Linden Dollars until that currency stablized. At the same time, the increase buying of SLL would cause the Linden to rise in price.

Overall, I love GOM. Its entire concept is revolutionary. But right now it just doesn't seem like the effort is going into expansion. Maybe its because of security concerns, financial issues, etc... From my point of view, I don't understand why GOM doesn't use BIBIT.COM or some other offshore credit card processing agency and just say (Up Yours) to PayPal. If players could pay GOM directly, they would never have to worry about charge backs. There are some technical payment bugs to work out across every game platform, but those are minor issues. IGE has a much larger operation, but they have one basic fundamental problem. And that is IGE likes to control the currency pricing and profit off a mark up on the currency. GOM makes its money off transactions, IGE makes its money off a markup. Much like a retailer adding in their profit margin. Which makes IGE more of a Game Currency Store Front and GOM more of a Currency Trading Market.

In any case, the future is so bright, maybe I'm the only one who can see the light. Hell, maybe I should stop talking and just start up my own market exchange. One that is built around the trader. Maybe even with links to arbitrage between IGE, GOM, and myself. Ohh well, back to the theory room with my mind.

It's a great idea alby, I don't know if there are enough savvy traders on the GOM that would utilize it unfortunately..

3% of little money is very little money. Also, short trading is inherently much riskier than trading long. If you trade short, the most you can do is double your money. If you trade long, you can infinitely increase your holdings.

Plus it's my contention that LL is going to move into L$ trading and GOM will have to shut down. So all that R&D for nothing..

What does this mean?

One possibility for Jamie is that you only have to escrow 50% (or less) of the amount you want to short. If the l$ starts diving then he can force you to cover and if you can't, you lose it all. This is assuming the l$ doesn't dive more than 50%, or if it does, he can sell all the l$ he's lent out above the short price..

If LL moved to setup there own in-house currency exchange, the GOM better work hard towards inter-currency trading. Cause then you'd still have savvy traders who would trade one currency against another. Buy some TBUXs for L$ and then convert it back for some profit. The folks just looking to aquire L$ most likely will be lost as GOM customers. But traders looking to play the market and take home a profit would utilize GOM.

And your right, 3% is peanuts. But if you multiply that by thousands of daily transactions, it adds up. For example, if GOM trades 1000 blocks (at L$1000 per block) for an average price of US$4.00, then US$4000 trades hands and GOM takes US$120 in profit. If they keep up that average, then US$120 x 365/days = US$43,800/yr. Not a bad chunk of change for acting as a currency exchange for traders/players.

Now lets factor this out for the sake of arguement. IGE trades currencies for 15 Multiplayer Games. If all 15 games averaged US$4,000 in trades and you took in 3% of that, your looking at $1,800/day x 365/days = $657,000/yr. I donno about you, but I'd take that any day. Its all an estimation....

Yeah.

The problem with trading the other currencies is delivery. I believe you can actually (theoretically) get your account cancelled if you buy money as it's against the EULA.

IGE gets around it by doing sneaky things, I think. If someone knows better, please let me know as I'm guessing a little here.

It's a good business to be in. IGE has some exposure to risk though .. one really has to wonder why the heck they don't follow the GOM model. They must have some secret sauce for arbitraging .. or maybe they're just worried that people wouldn't buy if it was on a market based model?

Still, you think they could just do partially filled market orders and then lock a certain amount on the market while a transaction takes place.

Or maybe the problem is bugs. You don't really want to have bugs in something like this, so the simpler the better..

Very interesting stuff though. I would have gotten into it, but I'm pretty sure LindenLabs doesn't want more people and they release their own trading system just to screw anyone that tries.