Market Discussions

EVE can support a a functioning options exchange that would have the knock-on effects of reducing the cost of loans and, eventually, fostering securitization.

Let that sink in. And then follow me through the journey that led me to this conclusion.

First, there's a market for gambling in EVE. We've learned that over and over during the last few years. People want to throw idle ISK at strangers so they can see a separate ISK balance on a website and then make bets.

Problem is, CCP banned gambling. And, based on my understanding, we may have some EULA issues with any system that relies on third-party sites this way.

That doesn't mean the underlying desire that the gambling sites met has disappeared. That means we've got an untapped market for speculative ISK betting.

I would posit that an options exchange can tap part of that market demand. A quick recap on options:

An option is the right to purchase or sell something at a "strike" price by or on a certain date. For example, I might get the right to buy from you a single tritanium for 6.00 ISK on November 30 at 12:00 UTC. If I don't exercise the option by or on that date, it expires worthless. That's a call option (because it involves the right to buy), I'm the purchaser, and you sold it to me or "wrote" it. In exchange, I would normally pay you something--a "premium."

Alternatively, I could get the right to sell to you a single tritanium for 6.00 ISK. That's a put option, but otherwise it's very similar.

Players could bet on the price movements of EVE items. It's not gambling, but it's speculation with a similar quality.

Here's where it gets beautiful. We have one set of players that might love to pay ISK to make bets on the price movements of tritanium, or PLEX, or injectors, or helium isotopes, or technetium.

And we have another set of players that's perfectly capable of realizing that, over time, they're likely to make money selling these purchase or sale rights to greedy speculators. Sure, I'll sell you the right to buy tritanium at 6.00--for .30 per tritanium. Every month. Forever.

To make this market happen, you need an exchange. In our case, a player or a small group of players need to take orders on both the buy and sell side and help make sure the market clears. Somebody has to take the buy orders, match them with sell orders, and pop out transactions.

That's where it gets tricky for EVE. Once you've got three players involved, we've got risk with a capital R written all over the situation. How to design the options exchange is key.

I believe we can reduce all risk in this situation to a single player who acts as an asset/ISK custodian--i.e., we can adopt a design that relies entirely on the third party model prevalent already. Here's how.

See, brokerages have had to contend for a while the risk that their clients can't make good on their promises. One of their solutions at times has been the requirement that clients only sell covered calls and secured puts.

A covered call is a call option just like described above, except the person selling the right has to actually have the item or money in place. So, to have a covered call for 1 tritanium at 6.00 ISK, I have to actually own 1 tritanium and have somebody hold it until the option expires. It doesn't matter what happens to the item's price in the interim. I'm good for it because I've got the tritanium and somebody else is holding it for me.

Likewise with secured puts--if I sell you the right to sell 1 tritanium to met for 6.00 ISK, I have to have the 6.00 ISK locked away with somebody else. Then, it doesn't matter what happens to the item's price. My ISK is available to buy it from you for 6.00 in case that's what happens.

The market can reduce all of the risk to a single escrow player who keeps one dedicated character to hold all of the ISK and assets for the options exchange. My suggestion would be for players to invest money/assets by 1) sending ISK to the character and 2) zero-ISK private contracts to the escrow character in Jita 4-4. For verification purposes, the wallet and total assets of the escrow character could be public via API. The escrow player just has to log in often enough to process deposits and withdrawals while communicating with the broker player.

Another player--or the same player--acts as the broker who actually operates the exchange. This player has to take orders to buy call/put options and match them with orders to write options while verifying that appropriate ISK/assets are in escrow.

Here's where we run into some EULA issues. How do you process a large number of commands without using a third-party tool?

My suggestion is to use EVE mails and an API reader. Basically, the exchange can set a standardized mail format that a custom application can parse, check against existing assets, and then change spreadsheet or database tables recording player assets and ISK. Speculators just have to know the right character to receive these messages.

So, once an hour or day or whatever, the broker player makes sure the application runs, processes transactions, and voila--the market happens.

The database or spreadsheet or whatever should also fuel a website that has quotes. Players could look at a great presentation of information with quotes like, to buy a PLEX for 1.12 bil a month from now, the bid-ask is 80-110 mil.

The broker would make money either through transaction fees per option contract or from a spread between the bid-ask.

I have more specific thoughts on how the market would function, but I'm getting close to the character max. Feel free to PM me with questions.

My next post will explain how this options exchange would reduce the cost of loans and foster securitization.

You lost (and had) me at ISK.

Started to get too dense for a.m. reading about halfway through the first post. Still, it sounds like an options exchange could be put together (by CCP) by combining the in game market and in game contracts. I'm not sure it would get enough use to justify dev time. But maybe it would. And it would probably draw a whole bunch of media attention for them.

Yes, that's the idea. All the third party/escrow person does is hold the assets/ISK and process deposits/withdrawals. If the API can be set up correctly, the escrow player may not even have to do any reports himself. The best case would be if the person accepts zero-isk deposit contracts, sends ISK for withdrawals, and accepts zero-isk withdrawal contracts with some kind of verification that the assets are available for withdrawal.

I don't know if your idea would work, but it's nice to have some creative thinking. This is EVE; it's about emergent gameplay. The system can benefit from greater financial development. Why not try something new?

While I like the idea to be able to trade derivatives, I’m not so sure that there’s enough demand to justify the effort to make it happen.

Let’s try an example. In this example I’m trading Charons in Jita. The current prices are roughly 1,276m ISK (selling) and 1,170m ISK (buying). Offshoring buy orders while trading the actual ships in Jita gives us deductions (with my current standings) in the amount of 1,01% on buy orders (1% transaction tax + 0,01% broker fee) and 3,05% on sell orders (1% transaction tax + 2,05% broker fee). This means my profit margin is 55.27m (= 1,276 – 1,170 – 11.817 – 38.918) per flip . ROI is 4.72% ((55.27/1,170)*100).

Freighter prices are currently under pressure because of the anticipated effects of the Rorqual changes to the mineral market and increased mineral supply from high sec alpha mining (more or less).

If I believe that prices will go up again soon (because reasons), it would be a good idea to invest in Charons and stockpile them (ignoring concentration risk and capital lockup costs here, to keep it simple). My bet in this scenario would be a selling price around 1,370m within the next 30 days which would result in a profit margin of 146.4m.

In the adverse scenario I believe that prices will go down further (because other reasons). My bet would be a selling price around 1,080m and a buying price around 990m within the next 30 days. Accordingly I sell all my stock now, even if this means taking a small loss, to avoid bigger losses.

Now factor in options.

For my example I’ll assume a system that’s coded into the game and only allows for covered calls and secured puts. Also I would assume taxes and fees comparable to the regular market .

In scenario 1 I might want to buy call options instead of freighters. My capital lockup is the same as before. However, I could decide not to buy the freighters when the option is due. The question is, where to set the premium (and how)? Considering that this is somewhat akin to a fully collateralized loan here on MD, I’d say a 2% premium based on the average between buy and sell price would be ok, resulting in a premium of 24.46m. This means I need to find someone who currently has a Charon or is willing to buy one and is willing to lockup this Charon for 30 days for 24.46m guaranteed and potentially an additional profit of 55.27m if I buy the Charon.

In scenario 2, instead of fireselling my Charons I could offer put options. But this is very much the same as a fully collateralized loan here on MD which usually values assets around 10%-15% under current buying prices

Tbh, at this point I don’t see the need for an options exchange. It doesn't even look attractive to me. It’s too complex and too slow to be a viable replacement for gambling and most if not all of it is already covered by MD or other possibilities. Sorry.

I sold a few Charons just before writing that post and still had it on my mind because of the marktet crash in that segment.