Eliminating High Frequency Trading and Creating ‘Fairer’ Markets
Cryptocurrency exchange PS Coin rebrands as Laissez Faire as it continues its mission to correctly incentivize trading.
The magic behind Laissez Faire is their incentive algorithm; an algorithm designed to encourage what Co-Founder, Daniel Pusateri calls "healthy" behavior among traders. Traders on Laissez Faire are automatically compensated with royalties for placing orders for as many units of currency as they can, as close to the bid-ask-spread as they dare. As a result, all of the bids and asks seen on the Laissez Faire markets are not an illusion of stability, but actual stability.
“With our algorithm, there are no discontinuities in fairness. The average Joe can place an order safely without feeling like a sucker.”
- Laissez Faire Co-Founder, Daniel Pusateri
Cointelegraph spoke with Pusateri about the company rebranding, the problems Laissez Faire is solving, security, and much more.
Cointelegraph: What did you learn from PS Coin and why are you rebranding?
Daniel Pusateri: I would say that most prominently I have learned a tremendous amount about security. I believe we have had more white hat hacker attempts than any other Bitcoin service, and their collective expertise has been invaluable to ensuring the security of our platform. I have also learned a considerable amount about the banking industry and regulation.
As for the why we are rebranding, there are four reasons:
- We have never been entirely "set" on the name "PS Coin.” However, instead of investing great time into coming up with something else, we have kept our focus on what really matters — engineering and launching the best product/service possible.
- Laissez Faire means free market (a market without government interference). However, I more generally interpret that as a fair market, and that is one attribute of our algorithm which traditional markets do not share. In traditional markets, high frequency trading probing orders and predacious trading puts the average Joe at a severe disadvantage when trading. With our algorithm, there are no discontinuities in fairness. The average Joe can place an order safely without feeling like a sucker.
- We had the unique opportunity to acquire LZF.com for only US$20,000 in equity.
- For the purpose of a banking relationship we are in the process of finalizing, we needed to move our US state of business to New Mexico (so it was good timing to change the name).
“Bitcoin does not function as a practical currency today due to its price volatility. We believe that our market algorithm is the only logically proposed solution to this problem to date.”
CT: What do you hope to accomplish with Laissez Faire?
DP: We hope to prove our concept of properly incentivizing markets by firstly applying our algorithm to Bitcoin bid-ask markets. Bitcoin does not function as a practical currency today due to its price volatility. We believe that our market algorithm is the only logically proposed solution to this problem to date.
CT: What are the problems of high frequency trading?
DP: High frequency trading is a predatory game. Firstly, it creates a lot of volatility. Especially for a currency such as bitcoin, volatility is detrimental to its practical function.
Secondly, it creates a lot of illusionary market liquidity and depth, and encourages spoofing. Thirdly, as an average Joe, you will never out-trade or outsmart predacious bots that are essentially waiting for you to place a healthy limit order.
“Predacious high frequency trading exists prominently because traditional markets encourage it.”
The entire purpose of bots in markets is to make money at the expense of everyone else. Virtu Financial is an excellent example of what I call an "apex" HFT-er. Have a look at this article. Virtu Financial has managed to profit every single day in the last 6 years with the exception of but one.
HFT-ers create a pyramid of predacious trading bots. At the top are companies like Virtu, which profit just a little bit from every HFT company below them. At the bottom is the average Joe who is in some sense being robbed blind by the bots who are constantly manipulating the market to their advantage at high frequency.
Predacious high frequency trading exists prominently because traditional markets encourage it. When it's free to do something, you tend to get a lot of it.
CT: Could you explain how your market algorithm works on a basic level?
DP: Our algorithm works by incentivizing placing orders for as many units of currency as you can, as close to the bid-ask spread as you dare, and having them sit there for a long time until they eventually execute.
When you place an order in our markets you pay 1 % in royalty to the other orders of the opposite type (Bids to Asks, Asks to Bids) that already exist in the market, and this is prorated based on how large the existing orders are and how close they are to the spread (Bids with "higher" prices, Asks with "lower" prices).
As your order remains in the market, it also accumulates these royalties based on the two aforementioned factors. However, you only "capture" (i.e., your account is credited) the royalties your order accumulates when it executes.
CT: Why do traders pay royalties when placing an order?
DP: It's a psychological factor to incentivize healthy market behavior among traders. By paying a royalty to the existing orders when you place a new order, you are essentially doing two things:  You are rewarding the existing, real orders that have remained in the market, thus incentivizing them to continue to remain in the market until they execute  You are making a real commitment towards keeping your order in the market until it executes (adding real liquidity).
CT: What safety measures has the company taken to insure the security of trader funds?
DP: Of course, we have excellent cold storage. However, the primary issue exchanges tend to have is not with their cold storage. It's with their hot wallets, which is why I think that should be the first topic of conversation when inquiring about an exchange's security.
In our case, we were in development roughly 19 months before our launch. With the help of cryptographers and decorated cybersecurity experts, we utilized that time to design and engineer what we suspect is the first and only online wallet which has all of the following properties:
- Our servers store no private keys unencrypted
- Our servers store no decryption keys unencrypted
- Our servers store no decryption key decryption keys
- A private key only exists in memory at the time a transaction is signed, then is promptly overwritten
- The unique data necessary to cryptographically arrive at a private key only exists in memory at the time a transaction is signed, then is promptly overwritten
- No more than one private key exists in memory at a time, per-internal node
- No more than one unique vector of data necessary to cryptographically arrive at a private key exists in memory at a time, per-internal node
- The time a private key exists in memory can only be measured in microseconds
- The operating system itself protects access controls, in such a way that there is only exactly one possible way funds can be sent within the checks and balances of our overall system
- Not even PS Coin (Laissez Faire) personnel at the highest level are able to manually access unencrypted private keys in any way, even if they have root access to our servers
- Even if all of our servers were physically stolen at any time, it would be computationally impractical for a bad actor to recreate even a single private key with the data stored on them
As I mentioned in an earlier question, I believe we have had more security bounty attempts than any other Bitcoin service to date. To that note, we have also had very few successful claims. Some of the security researchers have actually sent me emails showing bounties collected at other services, only to relay to me how much harder it was to collect even a small bounty through us.
CT: What currencies will you support?
DP: We are in the process of adding Euro, our first fiat currency. In addition to this, we already have Bitcoin, Nxt, Dash (Darkcoin), Litecoin, Peercoin, and Paycoin.
CT: When will LZF.com officially launch?
DP: Very soon. It could be as early as two weeks from now, but I cannot give an exact date yet.