Bitcoin Price Question

I mostly use Preev and Bitstamp to check the price but lately there have been significant price differences between the two. Of course there's always a small difference between sites but its been a difference of $30-$40 for the past few days I've seen. I've never seen this happen before. What would be the cause of this? Of course AB is always lower.


Comments


[3 Points] Theeconomist1:

Good old fashioned arbitrage due to market inefficiencies. This happens in any market, even mature ones. Now, as markets get more efficient, the prices b/w different exchanges coverge together quicker. The concept of high frequency trading works on these principles. ITs a little more complicated b/c many high frequency trading firms do shady and unfair things, but ignoring that, these firms take advantage of discrepancies b/w the difference markets for a particular equity.

Some people don't like the concept of arbitrageurs b/c they do take essentially risk-free profit, but it can be argued that they are important to help reduce the arbitrage. As the arbitrageur makes a trade, once they do enough the prices will converge and meet together so that the difference is very neglible - in other words, they help make markets more efficient.

In the bitcoin example, ignoring costs and such, in theory arbitrageurs could come in, buy on the cheaper exchange and start selling on the more expensive exchange. Now as they buy more from the cheaper one, the price will start ticking upward. As they start dumping on the more expensive exchange, the price there will start to tick downward. At some point, the prices will converge enough such that arbitrage opportunity doesn't exist (the prices don't have to be exactly equal b/c we all know that trades have cost and some risk due to fluctuations). So in essence, arbitrageurs have made the market overall more efficient by exploiting exhange differences and forcing the prices to converge. This is a very simplistic view into it, but that's the theory.

Anything traded on multiple exchanges will have price differences at some points. B/c the equity markets are very mature, those price differences don't last long (that's why high frequency trading has to happen at the microsecond level). These guys actually worry about the length of cable used in the data warehouse that connects them to an exchange b/c it matters that much. During hte early days, they would literally call the data warehouse and ask them to unwind cable, they'd pay a premium for their machine to be placed closer to the hub out. Microseconds matter in the equities market b/c these exchanges are very efficient overall. But hte fact is, anything traded over multiple exchanges will have price differences. A "perfect" market would not have price differences, but perfect markets don't exist. The less "perfect" a market is, the longer the price differences last and perhaps be bigger gaps. As markets mature, liquidity is there, and yes, evil arbitrageurs are around, the markets become more and more efficient and get as close to "perfect" as possible. But there will always be some difference - electrons can only move so fast across the wire. At some point, the laws of physics become the brick wall. Maybe Wall Street would then be compelled to figure out how to move shit at faster than the speed of light. LOL.

For less mature markets that have multiple exhanges, the price differences will be more pronounced and last longer. This happens with currencies as well. You can make hops between multiple currencies - say trade USD to Euro to Yen to USD and there could be a risk free profit there due to market inefficiencies. NOt at all saying the currency markets are immature, they are not, but it does take some time for all the currency prices and the combinations of routes to take to line up so that there is no risk free profit. Arbitrageurs contribute to doing just this.

AB is not a Bitcoin market maker so they don't set the price at all. They probably either take an average price OR perhaps they do set the price so its most advantageous to them. In either case, AB is simply using some sort of formula to arrive at its exchange rate, BUT they aren't an actual exchange and thus have no impact on the exchange rate.

I will note that b/c Bitcoin trades aren't "confirmed" or done instantly, this might be a big barrier to arbitrage oppty. It takes on the order of minutes to get a trade confirmed. This is a lifetime to an arbitrageur b/c the longer they hold the asset, the more they expose themselves to risk, and arbitrage is supposed to be risk free. I could think of ways an arbitrageur could combat the fluctation in BTC prices while they do their thing - they could buy underlying derivatives (options) that lock in rates to cover themselves. Of course, those have a premium and thus will impact how close the prices do converge. Bitcoin will mature at some point where these cases get covered and there is less exposure to the fluctuations of the underlying asset - Bitcoin itself.