The world’s first open outcry Bitcoin exchange and what it teaches us about clearing

I attended BitcoinExpo 2013 in London this weekend.   There were some very interesting talks and I met some great people. I thought there was perhaps a little too much focus on speculation, mining and trading but perhaps that’s just evidence of the maturity of the Bitcoin scene in the UK. Give it time.

That said, even I  couldn’t resist going along to the world’s first ever open outcry Bitcoin exchange.   In the bar of 93 Feet East on Brick Lane, Paul Gordon, a former trader, assembled a group of fifteen or so wannabe Bitcoin traders from amongst the attendees at the conference and created something rather special.


He explained the rules of the pit, taught everybody the hand gestures, ran a couple of trial runs and then trading began for real.  What I found so fascinating was that all the elements were there:

  • There were buyers: they used “pulling” hand gestures to indicate that they were quoting a price at which they would buy a “lot” of 0.01 Bitcoins (that is: they were quoting a “bid”)
  • There were sellers: they used “pushing” hand gestures to indicate that they were quoting a price at which they would sell (they were quoting an “offer”)
  • There were market-makers: these are people who quoted both a price at which they would buy and at which they would sell
  • There was a short-seller: he borrowed coins from somebody else, which he promptly sold into the market
  • There was a short squeeze: towards the end of the trading session, the other traders all knew he needed to buy back the coins he had sold short (to return to the original owner) and he suddenly found the price moving against him
  • … and there was a lot of paper: once each trade was struck, both parties to the trade filled out pieces of paper with the details of the trade (how many lots, at what price, with whom)


But what most interested me was what happened once the trading was over: there was then a spontaneous process of clearing.


In financial markets, clearing is the process of figuring out who owes what to whom and agreeing how they’re going to settle their obligations to each other.  You can think of it as being everything that needs to happen after a trade is agreed to get it to the point where assets can change hands. And that’s exactly what we saw happen here:

  • First, we saw trade matching: the parties to trades compared their paper slips with each other to make sure they agreed on the details of the trade
  • I also saw some evidence of trade netting: parties who had both bought and sold from each other realised they could cancel out certain trades, just paying the cash difference in the value of the trades
  • And I saw people discussing the mechanics of settlement: how exactly where they going to exchange their pounds and send their Bitcoins?

This is exactly what happens in a regular process of clearing in other, far more formal markets, such as the equity markets – and I thought it was fascinating to see it emerge spontaneously. Of course, clearing for a market such as the London Stock Exchange or in New York is somewhat more complicated than this. In particular, the role of a clearing house to support the concept of novation for netting is very important and the real-world model is hierarchical (involving Central Securities Depositories, Custodian Banks and lots of other players). But the essential character is the same.

In short, the core principles of clearing emerged spontaneously on a Saturday afternoon in a bar on Brick Lane. Amazing.