Op/Ed: How Supply Linden Games The L$ Currency Exchange
by Alphaville Herald on 21/06/10 at 4:40 am
by IntLibber Brautigan
Under a normal market, where there is a healthy flow of cash in and out of a given economy, those operating currency exchanges make significant profits in ways most people do not realize. With the LindeX, for example, the spread, i.e. the distance between the lowest sell price vs the highest buy price, rarely exceeded the exchange fee that LL charges users to use the LindeX. Many LindeX day traders would set up framing orders a mere 1 linden above and below the zero profit spread point, in hopes of catching some market activity to profit from. For instance, if you sell L$, you pay a 3.5% fee to LL, which comes out to 9.275L$ if you are selling 265L$ at 265L$/USD. If you buy L$, the fee is US$0.30 per transaction, which is pretty minimal unless you are buying paltry amounts. Still, it narrows the daytraders profit so that a 10L$ spread in prices means zero profit for the normal day trader.
Sudden volatility in the L$ currency exchange
Supply Linden, however, doesn’t pay a fee. He can trade at less than the spread and still make a profit, and more profit than most people perceive, because when Supply Linden buys up L$ that people are selling, the sellers are still paying a 3.5% fee and at the same time Supply Linden can be selling L$ on the other side of the spread for zero net change in the L$ money supply, but Supply Linden just earned 7+%. This is why Supply Linden would always stabilize the LindeX with large framing orders, of 10-20 million L$ on each side of the spread, making sure that, in order for other people to sell by limit orders, they would trade in a narrower spread so they could not profit from trading both ways. It doubled Linden Lab’s profits on the LindeX by doing so and boosted public confidence in the L$ economy by having exchange rates so stable.
LindeX would only have an excursion from this pattern on the weekend when whoever was running Supply Linden was out of the office and his outstanding limit orders ran out.
This was how things used to be run, when SL was a growing, happy, productive, expanding economy where people were putting more money into SL than was taken out.
This started turning around with the gambling ban in August 2007, when the size of the SL GDP dropped by almost half. Casino owners exited with their life savings, and gamblers who still had cash took their money out and went to the other internet casino sites. Along with subsequent bans of other legitimate economic activity (banking, advertising, as well as the homstead tier hike) more and more residents lost confidence in the SL economy and those managing it. They started taking their money out of SL in greater numbers than people were putting money into it.
When this shifted the flows of capital, then the LindeX became a liability to Linden Lab. While they were still making a 7% profit on trading activity, this profit was being drained by having to buy back more L$ than they were selling as capital fled the grid. At first this was a mere trickle. More users stopped bringing money into SL and only lived off of what they earned inworld, paying their US bills to LL with these earnings. As these numbers grew, they synergized on each other, accellerating the liability drain upon Linden Lab’s earnings. Their 7% profit shrunk so that some days they didn’t earn anything on the LindeX, in fact, it cost them more money than they profited.
At this point, it started to become economically advantageous for Linden Lab to cease this prior trading behavior, and let the L$ float freely on the open market, without the deep pockets of Supply Linden to keep it stable. Apparently the decision to make this change happened this past week.
Whether it was because LL didn’t have the money (the recent firing of over 100 employees speaks to their need to cut costs), or was merely trying to maximize profits prior to being sold off or doing an IPO, or perhaps Mark Kingdon forgot to assign someone to manage Supply Linden after whoever was managing that account was laid off a week prior. We will never know the truth, I suppose. Some have proposed that some disgruntled former Lindens are liquidating their L$ savings from their off-duty businesses. If so, they have had substantial savings of over a half a million USD to liquidate.
I believe that Mark Kingdon has realized that with the shrinking economy of SL, it maximizes profits for LL to no longer regulate the exchange rate of the L$. The recent exchange panic has put such a large quantity of sell limit orders on the market that it would cost LL over 6% of its monthly revenues to stabilize the exchange rate again at its former level. In addition to these 6% savings, he doesn’t have to employ someone to babysit Supply Linden’s trading activities, which should save the company at least another $150,000 a year in salary eliminated.
Boosting your profit margin by 6% is something most CEO’s aspire to. It is the thing that pays big bonuses and stock options at the end of the quarter. If the company is for sale, it helps ensure the company is sold for top dollar. Frans Charming commented over on New World Notes that IBM is considering buying Linden Lab. If this comes through, this may explain a lot of things that have happened lately. IBM certainly has plenty of its own staff who can handle all the things that those laid off used to do, so eliminating this redundancy is understandable. We’ll see what happens over the next weeks and months.
IntLibber Brautigan
Jun 23rd, 2010
Date Open Rate Close Rate Volume Min Rate Avg Rate Max Rate Min Qty Avg Qty Max Qty
2010-06-22 265 267 81,564,810 265 270.27 295 3 7,502 1,093,137
2010-06-21 276 265 78,973,024 265 268.22 276 1 7,094 1,000,000
2010-06-20 267 265 71,073,953 265 268.79 278 2 6,461 664,500
Adam Smith
Jun 23rd, 2010
I assure you that I am only in SL for academic purposes, I am studying the economic impact of the Zindra exile and will be publishing a paper on that very subject this fall. If you see me naked, it is only because I must disguise myself suitably to mingle amongst the natives undetected.
It's Unfixable
Jun 23rd, 2010
Meh – you can spout magic numbers all you want, Int-breath. I’m still rich.
Persephone Bolero
Jun 23rd, 2010
@IntLibber “While certain 19th century fantasists like Marx, Engels and Lenin tried to claim there were other models of economics that worked better, they were proven quite wrong and lie in the dustbin of history.”
Sadly, there really are people who still embrace their ideals. It’s the usual, “well let’s do it without all the starvation, murder, and oppression this time and it’ll work” pro-socialist, anti-capitalism argument.
Jen Shikami
Jun 23rd, 2010
According to LL’s economic statistics, looks like Supply Linden stopped selling $L on the Lindex way back in March:
https://secure-web43.secondlife.com/statistics/economy-data.php
So while it wouldn’t surprise me if that’s a factor in market stability, it doesn’t fully account for this week’s craziness.
Ted
Jun 23rd, 2010
Intibb,
It’s just as I told you, Linden can alter anything they want in their world with their imagination. They have complete control over everything in Second Life. You and many others keep looking at statistics and charts to base your virtual reality off of when indeed common sense will explain to you how all of this works. You were one that was indeed called one of the biggest fraudulent people in SL with your concepts of banking in a virtual world.
You have stated that it was Linden that caused the issues with the banking in SL, when indeed Linden cut off banks and banking in SL long ago. You now jump on the band wagon and sue over your losses and rights of access when indeed it has nothing at all to do with what happened in 2006-2007.
You Intibber just hop on whatever the stream of things seem to be going, while others in SL were ripped off of thousands of real dollars with your bogus bullshit.
Show me the degree and license in which you claim you have right to work with a quarter million dollars of risk management. I have it and have since 1973 as a second generation business. Show me where you have the skills and the knowledge to manage something in which you personally have no control over whatsoever.
You don’t, you never have.. and you are one that indeed should have been thrown out of Second Life. You sir, are a real scammer and exactly why I would never again venture into Linden Lab waters. They allowed it, they allowed the fraud, and didn’t support those that lost real dollars to the likes of those that had no real intention of any real business practice or licensing to provide for such. Because of people like YOU INTLIBBER, SL will die a slow and miserable death.
Ted
Frans Charming
Jun 23rd, 2010
*Hugs Ted* I think SL can weather it and come out stronger in the long run, but yes there are dark clouds.
I want to make clear, by my knowledge have I not said or intended that the Lindex is stabilizing. It is not. Before the crazy spike, the market was rising and will do so for a while longer, watch July.
IntLib said: ”
Therefore, it is physically impossible for Supply Linden to control the market selling activity of users with nothing but its own sell orders. Supply Linden can control the ultimate volume of sell orders by restraining himself from selling as well, but that sort of governor has very limited utility and is only of use in a market with a net positive flow of capital into the economy of the currency being traded.”
That is correct, and for the first time we are truly in a situation where demand for L$ is for a prolonged time smaller then the L$ in circulation.
IntLib said “there was a visible drop in user to user transactions of 50%, a drop in major market asset value of 30%, PMLF growth drop of 98%, both periods should have exhibited very significant drops in user confidence in the SL economy triggering a reversal in capital flows.”
Maybe should have, but it didn’t show a drop in User confidence? Maybe that is your answer. I became more confident in LL and the economy when they removed the (a lot of fraudulent) banking and gambling.
Maybe LL sold less L$, and there was still enough demand for L$ to support that rate?
IntLib Said “So no, the claim some are making that LL claims it only sells L$ is unsupportable from purely a market volatility analysis. It is statistically impossible to keep prices as stable as they have been merely by varying ones selling behavior. Such claims are bogus on their face, otherwise this sort of strategy would be used by governments around the world to keep their own currencies completely stable. Since they do not and cannot do so, then this claim fails and is a lie. ”
This shows that Supply Linden doesn’t buy, because in the current economy it shows that they can’t keep it stable, and explains why RL governments don’t do it. If Supply Linden bought L$ the market would be stable in a situation like this.
If there ever was a time to buy L$ it is now.
It is unstable, for exactly the reasons you say in your comments now. Supply Linden doesn’t buy L$ and there was never a need for it before. That might reverse now, but I expect them to first try to increase sinks, and maybe start a new marketing campaign to attract new users.
We are in agreement that the Lindex is not stable right now. There is more L$ then people have need for.
Only thing we disagree about is if Supply Linden bought L$ in the past.
It's Unfixable
Jun 23rd, 2010
Go, Ted, go.
It's Unfixable
Jun 23rd, 2010
Saying that I couldn’t have said that better myself would be redundant and painfully obvious to everyone.
Rinaldo Debevec
Jun 23rd, 2010
Hi Frans, thanks for your insight
One thing you mention is that you expect Linden Lab to “first try to increase sinks”. I agree! LL has massive capacity to buy up L$ by making some simple changes. To start, they could begin to allow users to pay their premium account fees in L$ instead of USD. That would provide a very reliable and predictable L$ sink. Another option would be to accept tier payments in L$ … but that would perhaps be TOO much L$ being drained! I think LL has a lot of elbow room to make changes like this, and it would not cause a ruckus because users would be happy to have the option to pay in L$.
But at present, I don’t see any such changes announced, and yet the L$ has not crashed, so I guess the sinks currently in place are adequate for the time being.
In the worst case, if it just became too hard to manage the exchange rate via the current method of sinks and sell orders, the lab can always just switch to a fixed exchange rate. Second Life would go on as usual for most residents … only the currency speculators would howl in disapproval!
darkfoxx
Jun 24th, 2010
Intlibber, it is very simple. The gambling buisness *did* have warning in advance that LL was going to axe gambling in advance, in the fact that internet gambling was illegal in the real world, and well, seeing LL is an American company, they had to comply to the law. No suprises there.
Anyone who has had money (real life dollahs) invested in anything in SL, has had ample warnings in advance that there was a certain risk of losing it all in one go, by the fact that it has been in the TOS.
If one never payed any attention to these warnings, then yes, i can speak of incompetence. If not simple, sheer stupidity.
If one did pay attention to the warnings, and took the risk regardless, kudos for having the balls for that, but if your investment does get axed, dont whine about it too much.
In any case, i wont take any advice from you and others who did the same thing wrong, financial or otherwise.
Emperor Norton hears a who?
Jun 24th, 2010
Persephone Bolero @ “Sadly, there really are people who still embrace their ideals. It’s the usual, “well let’s do it without all the starvation, murder, and oppression this time and it’ll work” pro-socialist, anti-capitalism argument.”
That’s what makes commies such selfish bastards. What is the point of being rich if no one is poor? Or being fat if no one is starving? Or free if no one is a slave? In a nut shell; you can’t win if no one loses, and by losing I mean lose badly. Instead those little psychopathic jerks like socialists and comies want whine about helping everyone, even the bad people.
As IntLibber famously said “A free man should be willing to die alone cold and naked in raw sewage rather than accept a hand out from another person” and tLibberr has his own sewer picked out.
Persephone Bolero
Jun 24th, 2010
@Emporer Norton “What is the point of being rich if no one is poor?”
So, wealth can only be created by making others poor? And in order to win someone must lose? What do you base these assumptions on?
This is what’s called the zero-sum fallacy. It assumes there’s one pie and we all fight over it. Yet, how do you explain the fact that refrigerators use to be in the homes of only the ultra rich? Just 30 years ago Motorola cell phones were $4000 each and cost 50 cents a minute to use. Today, even many homeless have cell phones. What government mandate forced companies to produce cheap refrigerators for the poor? What central authority put cell phones in so many hands today? Are there cell phone subsidies for those that can’t afford them?
None of that brought these conveniences to more people. Competition between companies in a largely unregulated market encouraged innovation to make manufacturing and retail processes cheaper and more affordable, thus opening up larger markets. Cell phones and refrigerators are just two examples. Most people are living in better standards than the generation before them. And during the past 30 years, economies have tended to move toward more economic freedom.
It is true that capitalism has resulted in unequal distributions of wealth. But that seems a much better approach than the alternatives, which resulted in equal distributions of poverty…and much, much worse.
And please don’t offer IntLibber quotes as if they’re my own. That’s a sort of straw man, which is the refuge of those that can’t refute arguments on an intellectual level. What does he have to do with me aside from both of us leaning toward support of free market ideals?
Emperor Norton hears a who?
Jun 24th, 2010
Persephone Bolero @ “So, wealth can only be created by making others poor? And in order to win someone must lose? What do you base these assumptions on?”
On MORALITY Persephone. For there to be good people there must BAD people. BAD people deserve to be punished. So when I WIN I have the moral duty to humiliate and abuse to the loser for the public good. That’s why there are slums were are all the lazy, insane, wrong skin colored people and Catholics are sent in real life; so the rest of us see what being a bad person looks like and know we are good people.
Persephone Bolero
Jun 24th, 2010
@Emperor Norton “So when I WIN I have the moral duty to humiliate and abuse to the loser for the public good.”
Oh, sorry. I thought you were a liberal arguing against the free market. Instead you’re just a Social Darwinist, which is neither socialistic nor free market.
Ted
Jun 24th, 2010
http://www.gamasutra.com/view/news/29111/Linden_Lab_CEO_Resigns_Shortly_After_Layoffs.php
And the ball rolls forward….
And of course we will have those that say… hmmm, I sure didn’t see that coming. Well, open your eyes.
IntLibber Brautigan
Jun 24th, 2010
Persephone,
Norton is PN, an actual PN member (unlike Woodbury folks who were accused of such). His game is merely to troll and lie and harass. His arguments carry no weight.
It's Unfixable
Jun 24th, 2010
Woodbury, PN – there’s no functional difference apart from which IRC they use.
Emperor Norton hears a who?
Jun 24th, 2010
Persephone Bolero @ “Oh, sorry. I thought you were a liberal arguing against the free market. Instead you’re just a Social Darwinist, which is neither socialistic nor free market.”
So what that makes you, a Socialist-Capitalist-Utopiast? Prok would be proud of you with you wholesale label dropping on people. “Social Darwnism”? Trying to pretend that this is some 19th “ism”. You think Summerians were using “Origins of the Species” as a guide 6,000 years ago? Get real, the only thing Summerians though writting was good for was keeping tract of how much wheat they had stored in their silos. What you call “social Darwinism” is literally as old as time itself. There has always been good people and bad people in society and the slum and prision to punish the bad people.
Take IntLibber; do you think he sheds a TEAR over the losers he crushes underfoot to create his business empire? Show me one post ANYWHERE were IntLibber regrets the suffering his success has caused. There is none, because IntLibber knows he is the good person, so he has nothing to regret.
Persephone Bolero
Jun 24th, 2010
@IntLibber “His game is merely to troll and lie and harass.”
I see that now.
Gaara Sandalwood
Jun 24th, 2010
“So, wealth can only be created by making others poor? And in order to win someone must lose? What do you base these assumptions on?”
I feel reminded of that old skit on Dave Chapelle about the difference between rich and wealthy.
Anyway, personally me, depending on who it is, I’d probably crush a few to get ahead a bit farther. Depending on who it is of course.
“Woodbury, PN – there’s no functional difference apart from which IRC they use.”
Hooray for ignorance. :p
It's Unfixable
Jun 24th, 2010
Yep – Woodbury exploited that ignorance for years, and it worked pretty well until the facade crumbled.
It's Unfixable
Jun 24th, 2010
Nobody’s that ignorant anymore.
Gaara Sandalwood
Jun 24th, 2010
Oh wow, do you really think that? No sarcastic remarks meant or desired, just asking, do you REALLY think that?
Kiddoh
Jun 25th, 2010
Unfixable: “Woodbury, PN – there’s no functional difference apart from which IRC they use.”
Gaara: “Hooray for ignorance. :p”
Unfixable: “Yep – Woodbury exploited that ignorance for years, and it worked pretty well until the facade crumbled.”
@Unfixable: So what you’re saying is Woodbury exploited your ignorance for years up until your trolling facade crumbled and thus you are admitting to getting trolled pretty hard by WU? ;o
darkfoxx
Jun 25th, 2010
What are the differences between PN and woodbury I wonder? Aside from the afros that is. Then again, when I visited the woodbury sims a while ago, there were a few afros in suits hanging around, with the woodbury group above their heads.
The similarities between the two groups are pretty obvious; 4chan memes, longcat, bridget, just to name a few. And fond of trolling and that whole dont take things serious thing. (which Intlibber really should have listened to)
The only real difference I noticed is that WU feels they’re better then PN. But doesnt everyone…?
Kiddoh
Jun 25th, 2010
@Darkfoxx: And when was this? WU discarded just about everything 4chanish when Soviet WU was created. You’d of course see a couple of Bridgets running around but that’s because of the fan group for people who like to make customized Bridget AVs. I should also mention the PN didn’t have any Bridgets.
So really the only similarities are a fondness for trolling and a don’t take things so seriously mentality which stems the fondness for trolling.
“The only real difference I noticed is that WU feels they’re better then PN. But doesnt everyone…?”
The PN goto sims and crash them; WU does not.
The PN spam particles everywhere and toss about spengbabs in public sandboxes; WU does not.
The PN will steal your money: WU will not (Intlibber doesn’t count).
WU has financial support and can help you earn many scholarships; The PN does not.
darkfoxx
Jun 28th, 2010
“Pn go to sims and crash them, wu does not.”
I heard statements from (self proclaimed) WU’ers that they in fact, have went out to crash (and spam etc) other sims, this was in a discussion about the responsibility of sim owners for the actions of the people visiting their sims, where the poster was of the opinion that the WU mods were not responsible for WU members actions as they only pulled against TOS shit outside of the WU sims.
Plus the stories that Tizzers banned anyone spamming on the WU sims, but has been proven to have been present for more then a few raids outside of WU territory.
So which to believe, you or other WU members?
Wether or not PN steals money, i never heard that myself, so ill leave that in the middle. However, I think it is pretty accurate to state that WU has cost people money, at least those people who payed for the sims that LL took. (twice.) Couldnt have been cheap… but yeah ill have to give you that.
The PN might not have had any bridgets (the bridget AV that gave me a tour of the WU sims ill ignore, was possibly not PN but WU), but to deny the everyone’s gay for Bridget meme’s existance, i think is a bit unfair. Like it is incorrect that communism, the latest and last WU theme, isnt a 4chan meme at all and totally unrelated in that aspect.
Also, wouldnt it be a smart move for any griefers to hide their relation to WU, to keep it out of the spotlight? Kind of like the whole ongoing ebaums distraction that 4channers outside of SL use. Rules 1 and 2 of the internet and all that…
Not wanting to present any of this as fact, but merely my suspicions.
Oh, and my own visit took place a little while after WU lost and rebought their sims for the first time.
Kiddoh
Jun 28th, 2010
@Darkfoxx: Sorry, this is a bit out of order.
I’m pretty sure the communism theme was totally unrelated to 4chan and was more-so inspired by Prok.
Although the “Everyone’s Gay for Bridget” Meme exists, people in the Bridget Brigade liked the character because of the character and not because of any meme.
Another thing to note about people from WU going out and crashing and spamming. Are they actual WU members or are they DW members posing as WU members? We’ve had troubles in the past with this sort of thing. I suppose this could also answer your question about why griffers do not keep WU out of the spotlight.