Saturday, September 19, 2009

Why is the bid-ask spread in Jita so wide?

I'm picky about game economics and I've yet to see a game come even close to right, but am happy to see that Eve has done a pretty good job. Most of the stuff in the game is built from raw materials that players extract from the environment. That's pretty cool. Manufacturing is not a second hobby that every character picks up (and therefore there aren't 500 million experts at manufacturing X), it's requires the player to spend time training manufacturing skills rather than fighting skills and it requires their time with no benefit besides whatever profit they can make. While there are definitely inefficient ways to make money, it's less clear if there is a best way to make prices bring the profit from different professions into equilibrium over time. And the market rocks. Well done, CCP. You can actually place buy and sell orders. There are relatively few items that the NPCs buy and sell, most of the market liquidity is produced by players. And best of all, almost everything in the game can be traded (even game time!) so nearly every action can be motivated by profit.

More coolness: People and things don't instantly teleport across the game universe. When you sell an item to someone, they have to pick it up where they bought it (or courier it). Space matters. And, mirroring real life, hubs have formed naturally over time, meeting a desire for concentrated market liquidity. Why do I go to Jita to buy some shiny new toys or sell my loot? Because I can sell or buy it quickly with relatively little markup. Why would I want take the opposite role and make a market in Jita on some item? Because there are hundreds of players buying and selling there meaning I can turn over stock pretty quickly.

All good so far, but one thing I expected that hasn't happened: the bid-ask spread in Jita has not narrowed so much that it's not worthwhile for the normal player to trade. I would expect this b/c I think the spread would be a function of:
  • The relevant transaction costs (could have an interesting side discussion about 'relevant')
  • The risk of adverse price movement (how likely is it the prices fall and you're stuck holding stock)
  • The volume of trade (in ISK, not units)

Basically, if the spread after transaction costs is profitable, the risk isn't enormous and I can do a good enough volume to make it worth my while I am going to trade trade. I don't think I'm terribly unrepresentative. And if there are lots of people competing to get the buy and sell orders, I would expect the spread to shrink since they're forced to outbid each other. It should keep shrinking until the spread is so narrow that it's not very profitable for most players to to trade the market. In an extreme case, it could shrink so far that the transaction costs would be larger than the spread for all but the most skilled toons. The extreme case does happen. Tritanium right now has a buy of 2.94 and sell of 2.97. I calculated my gross profit (sell minus buy) then subtracted out transaction costs and it was negative. So I can't profitably trade this. But that is an extreme case. It is more likely that the spread on an item would be wide enough to make money, but not enough money to justify the risk or be worth my time.

So, looking at recent Jita prices, I could place the highest buy order for a Small Salvage Tackle I at 900k and once I buy one I could place the lowest sell order for 1500K. Taking into account my transaction costs of around 30k (0.85% broker's fee x 2 + 0.7% sales tax) for the round trip trade, I can still make 570k per rig. That's a pretty good % return off of one trade. If I could move enough of these I could double my money. But I wouldn't trade this because I wouldn't be able to move enough of them to make it worth my while. The volume on this market is too low, only about 200 units a day. Meaning if I managed to capture every single trade over 24 hours (which would require constant attention for 24 hours and a lot of luck), I would make as much as 100 million. That's a little less than 5 million per hour, which is far less then I can make running missions (I like this break-even measure for considering if I should spend my time trading). And it would be incredibly tedious. For players poorer than me (of which there will be some, but I doubt a lot since I'm new to the game) this may be a good trade, but for most players it isn't worth their time either, so I'd expect them to ignore it. This means fewer competitors so I'd expect wider spreads.

So let's look at another example. I could trade improved implants. They frequently have a spread of 15M in Jita. Even with a volume only 50 per day, assuming you could snag every trade, that's 750 million per day, around 30 million an hour. That's pretty good money. I have to have at least 150 million to start with, but that isn't a high bar for most players. And I'm not speculating here, I've put my money where my mouth and I have made pretty good money trading improved implants . So if I would play, I would expect others to play. If others played, based on my earlier logic, players would be outbidding each other so I would expect spreads to shrink. But this is the weird part...they haven't. Spreads are volatile, but I haven't seen any trend toward them converging. And it's not from a lack of competition. If I place a buy order it will be outbid within 5 minutes, almost anytime day or night. Often I'll see multiple outbids within a few minutes (I place an order, when I check back in 5 minutes 5 buy orders are higher than mine). When that happens it implies 5 people are watching the market (or fewer people moving multiple orders). Side note: For a while I was curious if there were macro trading programs or something doing this, rather than actual people, but I can see no evidence of them searching around on google (please tell me if I'm missing this...would be curious how they work (though I wouldn't personally use them since it's a bannable offense (and yes, I tend to nest parenthesis in written English, it just seems so obviously reasonable))). So it seems like at any given point a few players are spending their time watching this market, hoping to capture that sweet spread. But as the market gets busier with competition, I don't see the spread collapse, I just have a harder time keeping my bid at the top of the pile. And, interestingly, THAT is what discourages me from playing this market. If there are 5 people outbidding each other then any given bid is only going to get 1/5th of the sales (assuming equal distribution of price changes, yada yada). So rather than the spread shrinking until it's unprofitable to trade, the spread stays reasonably constant but instead it takes more of my time to make that 15M trade. That is definitely not how I've seen real life work. When I buy something off Amazon I may go for the lowest price, but I don't think there are people behind the scenes checking in on their competitor's prices every 5 minutes and lowering theirs by $.01 (please please disprove me here b/c that would be awesome). This seems like some sort've artificial weirdness in the game, but I'm not sure what's causing it.

Who cares? Why have a I written a few pages to describe a phenomenon that is far removed from the pewpew and will likely interest the standard gaming populace about as much as a play-by-play of a 4 hour high-sec solo mining op? Because it hits all of our wallets and causes people to profit through mindless boredom (therefore encouraging this mindless boredom). If I can make a 15M spread on a high volume low risk item with total transaction costs of around 3M, you're essentially paying me an extra 12M to mindlessly outbid my competition by 0.01 ISK. That doesn't provide a service for you and it's not fun for me. I don't like that. So I'd like to understand this phenomenon and if possible fix what's causing it. But why does it happen? What is the game mechanic at the root of it? Or is it even a game mechanic that's causing it? Maybe I'm wrong and this happen IRL too (in which case RL examples could help me understand what's different between the Eve market and Ebay or Amazon). Regardless, I want to get to the bottom of this. I have some ideas of my own about causes but would like to start a discussion rather than continuing my monologue.

Oh, and feedback on my write-up would be appreciated too. Does it flow well? Do I make sense? Are my ideas logically connected and ordered in a way that makes it clear what I'm trying to communicate? Is this an interesting topic?

Sunday, September 13, 2009

Obligatory Introduction

Going to give a quick introduction (in bulleted list format b/c I think in bulleted lists not paragraphs), then I'll get into more interesting things like what I decided to blog. I think intros are important b/c I'm always wondering more about the people I read about and it takes a lot of posts to pick that up from context.

  • Demographics
    • 25, Male, East Coast, USA
    • Studied economics, finance and computer science in school
    • Currently employed at a major institutional investor, work a lot, love my job
    • Gamer since I was 4 years old (flight sim on the Mac, I crashed a lot)
    • I have a serious girlfriend who is a casual gamer as well
  • Gaming experience - MMO's
    • Eve
      • Since mid-June 2009
      • Characters
        • AllenRiley (primary - mission runner)
        • ThorRiley (alt1 - miner/hauler)
        • Expecting to also create PvP alt and maybe more
    • WoW
      • Since mid-March 2009 or so
      • Characters
        • JachJach, Thestian and Rashna
    • Everquest
      • Somewhere in the 2000-2002 range
      • Played for a few months in high school but was too ADD to settle on one char type and finally got tired of always being < lvl 20
    • The Realm
        • Back when I was a kid, probably more than 10 years ago
        • Played for a few years I think, loved that game but it started to go downhill
    • Offline games I love: Too many to list, here are some samples
      • Civ 4 (FFH mod almost exclusively)
      • Heroes of Might and Magic II-V
      • Sins of a Solar Empire
      • Elder scrolls series
      • Star Wars KOTOR and MassEffect (BioWare rocks)
      • Sims 1 & 2
      • Hellgate
      • Diablo 1 & 2
      • Halo 3/Quake 3/Duke Nukem/Doom
    I'm relatively old to games but relatively new to MMO's (or at least it's been 5+ years since I played an MMO, so I'm considering it a reset). This is my first blog about gaming. I'm actually fairly quiet most of the time...I don't even post on forums or comment on blogs. Hoping to change that now. But while I don't post, I do read a lot. I like being good at a game. I realize as a newbie (and given my attention span on games, I'm often a newbie) I'm going to be bad at the game (if it's at all challenging) and do lots of stupid things, but if I read what other people suggest for newbies and then adapt from there, I'm going to waste a lot less time and have fun a lot faster. So in Eve you never saw me flying around in a dual hull/armor tanking laser-fitted Caracal. I read the guides, I read battleclinic, etc. I fit it reasonably well for my meager skill-set. I still lost that missile-fit, shield tanking Caracal in low sec while running missions b/c I didn't fully grasp how stranded you are when webbed in a belt so didn't understand the value of watching local and aligning to a celestial. But at least I had to learn fewer lessons the hard way. I'm not saying I'm god's gift to eve and the super l33t ultra-n00b-pwner, I'm still going to do stupid stuff (my first loss was when I attacked a can flipper b/c he targetted me and I thought he was shooting me...then I kept wondering why he didn't get Concorded). But I'm not going to run around doing really stupid stuff and expecting no consequences (back to that Caracal, I knew I was taking a risk and what my downside was...I was insured and I had no implants, so the loss was only 500k, which I could easily afford at the time) in a game that prides itself on being an open ended sand box with very few guard rails.

    So, I like games, I'm not an emo-raging moron or a help vampire and I tend to be a lurker. I've been reading others' blogs since weeks before I started Eve and kept thinking 'blogging would be fun'. But what am I going to write about? I'm not living a life of low sec pirating adventure like Wensley, Ka Jolo or Mynxee. I'm still not even sure what I want to do when my char grows up. I spend most of my game time running missions or trading. That might be interesting to some, but I'm not sure what I'd write about. It's not like I have some brilliant trading strategy or am great at running missions. I occassionally dream of null sec grandeur, but don't think I have the time to be in a serious alliance and if I'm going to spend my time doing something boring (like gate camping or patrolling) I'd rather do it on my own clock, so I choose mining, running repetitive missions and moving bids and offers by .01 isk when I want to do something tedious.

    Then I was reading blog banter #9 hosted by CrazyKinux and immediately wanted to jump in and comment on different bloggers suggestions for what they would remove from the game. I like playing games, but I love gaming mechanics. I love to see a game that gets it right (fun, original, at least somewhat rational) and cringe when a game does stupid stuff (like requires lots of repetitive action, stuff appears out of thin air, the game breaks its own rules, etc). So many wonderful games are ruined by annoying mechanics and many others have something that just gnaws at me even though I keep playing. I'm probably pretty picky, but I also try to be thoughtful about it. If I see something strange or annoying in a game, I want to really understand what the problem is and how to fix it, not just jump at the first solution that comes to mind. I also try to be objective about the mechanics, not just 'this is how I like to play the game so cater to people like me'. So given my (attempted) objectivity, non-stupidity and broad gaming experience as well as my interest in the topic, I think I might have something to talk about. It's not even a bad subject (I don't think). It's certainly a subject that everyone seems to relate to and have an opinion about.

    So, get excited, another Eve blogger has entered the sphere (maybe not all the excited...there are 200+ on CK's blogroll). If I can keep my attention span and people find my writing interesting, I may even stick around and make a difference. But for now my girlfriend is wanting to play WoW, so I'm just going to end with a teaser about different mechanics I'm thinking about rather than diving into anything meaty.

    Why is bid-ask spread in Jita so wide?
    Is there really no way around invincible, god-like Concord police to ensuring the safety of high sec?
    What benefit does insurance provide? Should it cover more or less? Should there be restrictions on payouts? Does the low payout on T2 help the game in some way?
    Add 25 m^3 of drone bay to the Rokh (couldn't help it)

    I'm used to open and honest feedback. I particularly appreciate negative feedback b/c it's actually useful. You don't have to be polite, you can tell me I'm a stupid f*cking moron if that's what you think. But if you can't give me a good reason why I'm a stupid f*cking moron I won't pay much attention to it.

    And yes, I've read enough forums and blogs to realize that I don't really need to tell people they can speak their minds.