What is the critical mass of transactions needed for an asset to be on an exchange?


2

I have several startup ideas in this field, and I am very uncertain about one critical factor, hence this question.

I want to make an exchange where one can buy or sell intangiable assets. I know that no investor will invest in an asset unless is has a certain degree of liquidity. Such liquidity is not a concern if the asset in question is for example gold, which every investor knows that he/she can sell at any time. It is, however, a problem if the asset is something like a virtual island in an online game.

My question is, therefore, how many percent of the total asset value do you believe needs to be exchanged per day in order to achieve critical mass. By critical mass I mean many enough for an average investor to feel confident in investing in the asset. Think of the asset in question like real estate in an online game you have never heard of.

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asked Dec 20 '10 at 03:30
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David
1,567 points

3 Answers


3

Generally, what you are talking about is known as Market liquidity Volume is not a measure of market liquidity .

In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value.

Important part here is "without causing a significant movement ". In other words it is irrelevant the percentage of exchanged virtual goods but how the price changes if they are exchanged. Price change is a risk for investors. The bigger the risks the less likely investors to participate for fixed return.

What you most probably want is to create high market liquidity, or at least sense of it. You can use different methods to achieve this goal but this is the subject of another question.

answered Dec 20 '10 at 18:25
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Ross
2,288 points
  • You are absolutely right! You are very clearsighted on this topic. I guess now, I have to figure out, the level of liquidity needed for various kinds of investors to be interested. – David 8 years ago
  • My day job is connected to estimation of financial risk, so I have some clue :) – Ross 8 years ago
  • What you say means that if the market does not have much information about an asset, that asset will naturally be less liquid, because the market will believe that someone has new information about the asset, if they suddenly sell out a lot. Is this correct? – David 8 years ago
  • No. THe market is liquid if there arep eople providing liquidity. Interesting enough thisis a circle - liquidity providers go where they already have liuidity. This is why most stock excahnges (even if you tend to ignore this - nice trait) have / had market makers, t make sure there is a defined level of liquidity most of the time. Market Makers have a contract forcing them to pfovide a bid and ask prie for a certain volume for a certain percentage of the time, simply speaking. WIthout a market maker, you are stuck. NO liquidity = no traders = less liquidity. – Net Tecture 8 years ago
  • Kickstarting a product even in an established market on an established exchagne is HARD. Example: CME group eMini money contracts. Little volume, little liquidity, pretty much all provided by hedging computers against forex. The exchanges even waive their fees to get a new product off the gruond and it STILL does not trade a lot. Or look at the weather futures. VERY little liquidity. – Net Tecture 8 years ago

-1

Most markets are not built on the tangible value of the asset trading. If they were the NYSE would crash, and people would realize that it is a PONZI Scheme.

I personally convince anyone not to invest if they dont have to. If you have worked at any publically traded company you realize the amount of $$$ wasted feeding the giant. A lot is wasted on corporate compliance, team building excersises that do not work, expensvive leases, company lunches, etc.

The reason any market will be successful is the opportunity to make money. The markets we have in the USA are like musical chairs, if everyone pulled out their cash someone would be left with a product that is worthless, and no chair to sit on. Most companies trade way beyond their value or revenues. You could make a market where someone would be interested in taking part, because there is an opportunity for money.

As an investor, I have put my money behind 2 startups which i knew were JUNK, but i knew that if i invested, took them to the next level, that their would be an ass waiting to buy my share (ass for my seat), at a higher level. Those asses (same investor in my case), bought my shares looking to do the same. most professional investors rarely invest insomething because it has value, they invest because they are trying to ride the wave up, or get in low, and sell high.

answered Dec 20 '10 at 10:32
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Frank
2,079 points

-2

My question is, therefore, how many
percent of the total asset value do
you believe needs to be exchanged per
day in order to achieve critical mass

Let me just say that you have no clue what you are talking about (i.e. trading).

Your question is irrelevant.

In general, the quesiton you want to ask is:

  • What turnover of whatever shares do you want per day (1000? 10.000?)
  • Who is going to make a market? Make a market as in be the MarketMaker. This is a defined term - you better find out what that means right now.
Think of the asset in question like
real estate in an online game you have
never heard of.

VERY hard to get that into any realation. Do we talk of an in game exchange, or out of game? In game is more feasible - out of game you possibly have nothing on the table that interests anyone to make a market and without market maker you will lack the at least semi-permanent bid/ask that is needed to provide a basic liquidity.

hom do you want to trade? A professional / semiprofessional trader? better give me something that
* Guarantees integrity (no money just taken away)
* Has a combined market value allowing me to move around half a million in value at a moments notive.
* Provide professional data streams and exchange type clearing systems (automatic stops etc.).

Or is this targeting low value in game "players"?

Did you check out the legal requirements? Not joking here - you may find out it is illegal without some licensing in your current jurisdiction. After all, some of the stuff you do there borders the banking industry (no, IS banking, like holding accounts for third parties).

In general, I would say some in game thing is most likely diable, some out of game thing totally undoable. YOu wont be able to kickstart proper critical mass, and you wont be able to provide acceptable liquidity / infrastructure.

answered Dec 20 '10 at 04:57
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Net Tecture
11 points
  • I certainly do not want to ask your proposed question: "•What turnover of whatever shares do you want per day (1000? 10.000?)". This is completely irrelevant as it needs to include the value of each share. There might be a need for a market maker, but not necessarily. As is described on wikipedia (http://en.wikipedia.org/wiki/Market_maker) stock exchanges do not have any formal market makers. The rest of the general problems you describe about exchanges are irrelevant for my question (which was very specific in character). – David 8 years ago
  • No. It is not. Seriously. There are seriously MarketMakers on pretty much all primary exchanges who get serious rebates for their services in terms of fees, up to being paid. Acutally this is what the article in Wikipedia says... are you too stupid to read it? "In the United States, the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), among others, have Designated Market Makers, formerly known as "specialists", who act as the official market maker for a given security.". This is particularly needed if you can not make an active market due to not having the volume. – Net Tecture 8 years ago
  • Whatever....... – David 8 years ago

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