Anonymous Trading
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Anonymous trading is a condition that allows potential trading partners to exchange goods and services without much common knowledge, either of each other’s behavior or of the goods they trade[1].
Anonymity plays a key role in market participants’ trading strategies as part of their efforts to obtain the best execution. It is also an important element of market design for exchanges, as it affects their competitiveness vis-à-vis other markets[2].
The anonymous trading for small and the biggest
Approach depending on the size of the person interested in anonymous trading[3][4][5][6]:
- First concerns small entities: Anonymous trading is not only important to bridge the geographical distance, but also to bridge cognitive distance without incurring high transaction costs. There is no need to get involved in analyzing each other's track record in previous exchanges. The parties simply don’t' know each other and – most important – do not care about knowing each other. The cognitive resources that they save by avoiding socialization can be more beneficially invested in accumulating more private knowledge to strengthen one’s own comparative and tradable advantage. Anonymous trading allows trading partners to overcome the transaction costs, large community size and information asymmetry problems.
- Anonymous trading conditions are not only necessary to enable trade between parties who do not know each other because of geographical and social distance, they also facilitate trade between parties who do know each other because of proximity but don’t want to let their business come between their social relations. (Example: Buying a computer from a friend’s store in neighborhood - when you detect any failing, the warranty arrangement allow you about care of the problem by the producer).
- The second approach is important for big and meaningful traders want to make trades, mostly on a large scale. In their interest, the most important thing in such a case is to maintain anonymity until the very end. Stock exchanges like NASDAQ, New York Stock Exchange, and London Stock Exchange, have in their offer ideal solutions for the largest companies, similarly and dark pool allows you to keep the secret of your participation. The first approach is the most frequently chosen.
- The essence of anonymous trading is that investors who want to invest large amounts of money do not want information about their intentions to come to light. The reason for this is that the competition could falsely raise the price, which would make the investment unprofitable. It is true, however, that every order is not able to be fully anonymous because there are legal regulations that must be complied with for everything to be legal.
Examples of Anonymous Trading
- Cryptocurrencies: Anonymous trading is a key component of many of today’s most popular cryptocurrencies, such as Bitcoin. Transactions are conducted without any central authority or intermediary and are recorded on a public ledger that allows users to remain anonymous.
- Dark Net Markets: Dark net markets are online marketplaces where users can purchase a variety of goods and services anonymously. These markets use digital currencies such as Bitcoin to facilitate transactions, allowing users to remain anonymous.
- Bartering: Bartering is a form of anonymous trading in which two or more parties exchange goods or services without the use of money or other currency. This form of trading is common in remote or rural communities, and the anonymity of the trade is often preserved by a lack of records or documentation.
Advantages of Anonymous Trading
Anonymity in trading can have many advantages, including:
- Security - since no information about either party is revealed, it can help protect both parties from potential fraud or financial loss.
- Privacy - since no personal information is shared, it allows buyers and sellers to keep their transactions and activities private.
- Lower transaction costs - by removing the need to vet buyers and sellers, anonymous trading can reduce the costs associated with traditional transactions.
- Increased access - anonymous trading can open up new avenues of trade to those who may not otherwise have access. This can include individuals in countries with restrictive trade policies or those who may not otherwise be able to access certain markets.
Limitations of Anonymous Trading
Anonymity in trading has its own set of limitations that must be taken into account. These limitations include:
- A lack of trust between the two parties, as there is no way to verify who they are trading with or whether their goods or services are of a certain quality.
- The lack of a proven track record of success or reliability of either party, which may discourage potential traders.
- The inability to enforce contracts, as both parties remain anonymous, making it difficult to hold either party accountable for any promises or agreements.
- A lack of access to legal recourse or arbitration, as both parties are anonymous and there is no way to verify who is responsible for any alleged breaches of contract.
- The possibility of fraudulent or counterfeit goods being traded, as there is no way to verify the authenticity of the goods being exchanged.
An introduction to other approaches related to Anonymous Trading is that they are all methods used to facilitate the exchange of goods and services without any knowledge of the other party's behavior or of the goods being traded. This includes the following:
- Blind Trust Trading - Blind Trust Trading is a method of anonymous trading in which parties use a third-party intermediary to complete their transactions. The third-party is responsible for verifying the identity of the parties and for ensuring that the exchange is fair and secure.
- Decentralized Exchanges - A Decentralized Exchange (DEX) is a type of anonymous trading platform that operates without a central authority or a third-party intermediary. Instead, trades are managed directly between two parties on a peer-to-peer basis.
- Escrow Services - Escrow services are a type of secure third-party intermediary service that is used to facilitate anonymous trading. They are responsible for holding funds on behalf of both parties until the transaction is completed.
- Online Auction Platforms - Online auction platforms are another type of anonymous trading platform. They allow buyers and sellers to post items for sale and for bidders to place bids on them.
In summary, Anonymous Trading involves a variety of methods that allow for secure and anonymous exchange of goods and services. These include Blind Trust Trading, Decentralized Exchanges, Escrow Services, and Online Auction Platforms.
Footnotes
References
- Comerton-Forde C.,Putniņs T. J.,Mei Tang K. (2011)., Why Do Traders Choose to Trade Anonymously?, "Journal of Financial and Quantitative Analysis", February, Sydney
- Comerton-Forde C.,Mei Tang K. (2007)., Anonymity, frontrunning and market integrity
- Foucault T., Roell A.,Pagano M. (2013)., Market Liquidity: Theory, Evidence, and Policy, OUP, USA
- Grimstvedt Meling T.(2017), Anonymous Trading in Equites, No. 7/17
- Halsey D. (2013.)., Trading the Measured Move: A Path to Trading Success in a World of Algos and High Frequency Trading, John Wiley & Sons, Hoboken
- Martens B. (2012)., The Cognitive Mechanics of Economic Development and Institutional Change, Routledge Frontiers of Political Economy, Abingdon
- Mizrach B.(2005)., Does SIZE Matter? Liquidity Provision by the Nasdaq Anonymous Trading Facility
- Smith Y. (2010)., ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, St. Martin's Press, USA
Author: Dawid Kuczkowicz
