Another banker bot algorithm and the optimum currency trader

From Free Banking:

Hayek-Style Cybercurrency

One of the main problems with Bitcoin has been its tremendous price instability: its volatility is about an order of magnitude greater than that of traditional financial assets, and this price instability is a serious deterrent to Bitcoin’s more widespread adoption as currency.  So is there anything that can be done about this problem?

Yes, and author, Kevin Dowd proposes one. The idea is for the bot to have Seigniorage Shares and digital money, like bitcoin.  The bot trades one of these units for the other to keep the digital coin matched to the dollar, as long as the Seigniorage shares are not tradeable.  The units should be bets placed by member banks based upon their guess that the digital coin is deflationary of inflationary with respect to the targeted dollar.

If the Seigniorage shares were tradeable, we end up with two units of account. But otherwise, we end up with another Black-Sholes, because both variance in Seigniorage Shares and the deviation from target of the bitcoin  must be adapted probability distributions.

The issues everywhere for banker bots remains, they cannot loop out and target a long distance aggregate variable. Banker Bots have only one no arbitrage choice, get good member banks.

Another method to target bitcoins to dollars is to keep both dollar and bitcoins on deposit with the bot. There is no interest rates at all. The bot watches the ratio, $/Bitcoin, and watches its second difference and its third difference.

Dynamics:

Call those ratios r,r' and r''. The we want r*r' +1/2r'' = 0, the flow constraint. When that is exceeded, the bot swaps  bitcoins in the denominator, to make r' and r meet the constraint.

I think in this scenario, the bot pays the value 1/2r'', when that moves higher, the player win, when it moves lower the bot wins. So players add or subtract dollars in the numerator, changing the ratio. The bot add or subtracts bitcoins from the denominator  then pays or wins 1/2t'', the sign set so players maximize maximize t''.  Wythoff rules should apply, players can only take from numerators and denominator together only in equal amounts, they do that to remove winnings. The change in denominator are bot bets. I think payoffs are automatice by the way the bot manipulates the denominator.

For multiple currencies, the numerators always settles into the market value of the currency, and the bot always end up with the same denominator.  The betting quants change between currencies, so bitcoin becomes the nominal, stable currency trade.

What does this mean for currency markets? It means currency traders will have fair queuing and no arbitrage trades, always.  Currency cheaters go out of business, like right away, so all currency swaps will be in bitcoin. As long as traders have earn the maximum, then there will be no better elasticity for currency markets.

How does one win the brass ring?
Always bet that the denominator goes to Phi.  Add or subract the currency value that moves the denominator to Phi. The numerator, for whatever currency, becomes the quant, the basic trading quantity in the currency markets.  Banker bot is just maintaining the index among the traders, that is all. Central banker can still foul up the money, they just end up doing it in its proper quant size. Traders make this work because they win by discover the utility of all the various currencies from down stream sources.

Isn't this magic?
No, because it  is a self adapting system and bitcoin measures the adaptation process. It is based on the desire to maximize the number of digits in your bitcoin wallet. Winning is making the index, or count of things, get larger. This is automatic finite log, I think. I works whenever there is an index in operation, like web searches and clicks. It is the basis of the singularity though, I think. I think Goldman Sachs has one of these up and running, and they  manage debt flow and primary dealers are their member banks.

Why doesn;t banker bot just go straight to Phi?
It needs to incentivize traders on the real value of currency, so it marches along with them as they get more accurate. No arbitrage, that is how web bots become so friendly and popular with humans.

What about stocks?

Sure, no problem. The bots can manage one stock each and provide no arbitrage trading. Each stock will end up with the closest integer index that allows it to be in sequential order with the entire stock market.  Since the no  arbitrage index is valuable, humans will do this within the next few weeks. All of this is happening right now, on the web.  We are doing a singularity.

How do bots grwo in intelligence?

They locat each other and make number bets that drive the denominaotr to Phi. All of this works, with semantic networks, scientific theory, images, language, currency as long as humans somewhere are incentivized to find the ordering of the basic elements. But it does not take much incentive, simply the desire to have the best answer the soonest will do it. These bot are cheap.