Members of the Gutter waste a lot of time proposing, counter-offering, counter-counter-offering, etc. trades that have a low likelihood of success, partly because both sides reasonably assume the other either knows something they don’t or are trying to get the upper hand. (Otherwise, why would they trade?)

One of the most common questions we hear here at the Gutter Post is how to value trade assets using available data. Clearly no one piece of data is enough. Let’s quickly dispense with the obvious candidates, starting with the simplest situation — wanting to trade floor of one species/clone for 1+ of another:

• Floor price: good when assets are routinely selling at that price without causing it to move too much. But those assumptions are rarely all true at once. The floor price will also always be biased too high, since you know at least one is available at that price from a seller but not a buyer (or it would be sold already!)
• Bid price: similar to floor price, but the opposite. It will always be biased too low, since you know at least one person will buy at that price but no one is selling (or it would be bought already!)
• Midpoint between bid and ask: a reasonable compromise that shouldn’t be too biased as long as there are several assets for sale near the floor and several bids near the high bid. As a benchmark, you might use this if say 3 bids and 3 offers exist within 2-3% of high bid and low ask.
• Last sale at floor: this is probably better than the previous two since it at least reflects an actual buyer and actual seller arriving at a price. There’s some complexity here, as negotiators might differ on what defines a “sale at floor” and if the sale was 12 hours ago may not reflect the current reality of the order book on either side.

If you combine them or at least triangulate between them, you can arrive at something more reasonable though. Let’s say you pick some combination of last sale at floor and midpoint between bid-ask. When I quickly did this for cats and pigeons:

• Cats: 5.75 offer (several within 3%), 4.9 bid (two bidders fighting), 5.6 last sale. Synthesizing that, I think 5.50 is about fair.
• Pigeons: 1.09 offer (several within 3%), 0.92 bid (6 bids within 3%), 0.95 last sale. Synthesizing that, I think 1.00 is about fair.

One additional item worth considering is the liquidity of each collection. Cats can see only one sale on some days, while pigeons usually see several sales per day (as do rats and dogs). I don’t consider this to be major additional risk, but if you wanted to reduce your value of a cat by 1-2% relative to a pigeon for this liquidity risk, that would be reasonable.

Putting this all together, in my humble opinion a 1-for-5 trade cat for pigeons would be fair as would a 1-for-6 trade, really just depending on who’s more desperate to make the switch. A 1-for-4 trade or a 1-for-7 trade would not, unless there was something special (i.e. non-floor) about one of the assets.

Next time we’ll augment this approach to account for non-floor traits! #ganggang

Analysis Trading