SBF

Chapter 11The Exchange Business

Imagine you have $500 in coins, right? Actual metal coins.

You've got all kinds of coins. Silver dollars, half dollars, quarters, dimes, nickels, pennies. You've got some other kinds of money, too. Some euro, some Korean won … maybe pesos? Whatever! But it all adds up to $500.

You take a shoebox and stack all the coins up inside until you make a very cool replica of downtown Minneapolis. You take a photo, post it to Instagram, and it gets all the likes.

Amazing.

Next, you put the lid on the box, seal it with duct tape, pick it up and shake the living hell out of it.

How much money is in the box when you open it back up?

There is still $500 in the box. Because it was a box. It was closed. It doesn't matter how you stacked it before or how much you mix it up. That's how money works. It's just a number; no matter how much you move it around there's still the same amount there.

That's how the exchange business works, too. Or it should be.

You could call the shoebox a toy model of the fundamental business of an exchange. It's just that. People put money in the box, and everyone using the box plays with it to their heart's content. The money doesn't even have to move around at all. The money can just sit, the trading happens in a regular old database, like the ones that run Twitter, Facebook, and the terrible software behind your doctor's website.

From a bookkeeping perspective, running an exchange should be dead simple.

Let's imagine an exchange that ...