The New Economics of 'perfect market equilibrium'
Transitioning to a new More Efficient 21st Century Digital Global Market and egalitarian Economic System
By Simon Heskett
What is Perfect Market Equilibrium? Perfect Market Equilibrium is a new higher state of efficiency global fungible markets can accede to under the post internet digital market structure of dis-intermediated P2P, where established market tenets and principles are fundamentally rewritten. And from this, the implementation of a new global P2P Forex and cross border payments architecture, which dismantles the archaic, inefficient processes and methodologies of the risk based inter-institutional OTC Forex market and interbank correspondent payments model.
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In its stead, a new more efficient risk free market and frictionless cross border payments architecture, where the new Absolute Free Flow of Money is also acceded to. The Absolute Free Flow of Money, based on a radically new 'Perfect Netting' of cross border payments, also affords the opportunity to route global monetary flows through Central Banks, but not restricted to them, under a new streamlined and consolidated sovereign currency payments architecture. And this to provide Central Banks with new economic levers, with which to novelly control the velocity at which money circulates in the global economy. Known as Global Monetary Velocity, it is the basis for a new 21st Century monetarist economics and transition to a New Economic System, better able to interpret and accommodate the new landscape of globalisation, over the largely failed systems and economics of a pre-internet, pre-globalised, insular age.
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Economic systems have forever transitioned 'as a product of their own time and age', A History of Economics, P.1 JK Galbraith. Yet it it might be argued, failure thus far to transition the global market structure, underpinning our free market system, from 'pre-internet intermediated wholesale' to that of 'post-internet dis-intermediated P2P', with all of its inherent and innate structural advantages, is the resulting inability to evolve to a new economic system.
It is posited, that it can only be through this structural transition to the higher state of Perfect Market Equilibrium, that the fault lines of the existing global market structure be addressed and a new economic system, better able to meet and interpret the new landscape, acceded to.
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In this regard, the new higher state of Perfect Market Equilibrium is to be implemented under a new consolidated and integrated P2P Fiat Forex and cross border payments platform, which with no conventional core risk or friction points, can value and perform more efficiently than the intermediated wholesale construct.
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It is to be also similarly implemented as a new consolidated and integrated CBDC (Central Bank Digital Currency) P2P Forex and cross border payments architecture, which resolves the flawed methodological approaches and incompatibility complexities of existing wholesale CBDC projects, where risk, friction points and unresolved configurational and interoperability issues abound.
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If CBDCs are to displace the systemic destabilising and global economic perils of cryptocurrencies in the seamlessness of their universal application, then there can be no structural flaws, friction or risk points associated with the global build out of CBDC Forex market valuation and cross border payments, which the existing inter-institutional wholesale approach, on evidence, appears not to provide for.
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the higher state of perfect market equilibrium
The Law of Supply and Demand ‘forms the theoretical basis of modern economics’, and indeed underpins the Free Market System driving the global economy. The importance and significance of this foundational law, has led to its extensive economic examination, notably through Economic / Price Equilibrium Theory. Generally speaking Equilibrium Theory is an endeavour to understand and interpret the behaviour of supply, demand and prices within different types of markets, be they perfectly competitive, monopolistic, partially monopolistic, etc.
And this, with the objective of establishing their optimal state, which is equilibrium or market clearing price. At this point, the market clears all supplied and demanded goods within it, leaving no surpluses (excesses) or shortages.
Early seminal works by Cournot 1838, Jenkins 1870, Marshall 1890, to name but a few, laid the foundations of supply and demand curves and their eventual relationship to price, which have been evolved and expanded upon ever since.
Existing Equilibrium Theory, with respect to market clearing price, is postulated on ceteris paribus. Ceteris paribus (all other things being equal), assumes 'supply and demand' are balanced and in the absence of external influences, economic (equilibrium) variables will not change. As a theory, it is an idealised state, the markets of which it seeks to interpret can never truly or fully reflect.
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Furthermore, as a 'static' theoretical model (owing to ceteris paribus), it fails to account for the dynamic interaction between the variables of supply and demand, in pursuit of equilibrium or market clearing price.
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The new economics of Perfect Market Equilibrium breaks with conventions, in that it is not an idealised state, but in fact a new applied ultimate state, global fungible markets can accede to under the different post internet market structure of dis-intermediated P2P. This ultimate state is the new ability to find and maintain an absolute equilibrium point or market clearing price at all times. And as a new dynamic model, it postulates that despite the differing and ever changing (shifting) variables of supply and demand, absolute market equilibrium point is never deviated from. Surpluses and shortages consequently never arise and furthermore, operating at this new absolute market equilibrium point, instantly perfectly clears all trades at all times.
Defining Perfect Market Equilibrium and its TRANSITIONARY IMPLICATIONS
Perfect Market Equilibrium, as a new precision P2P valuation, is the ability for global fungible markets to find an absolute market price equilibrium ‘point’ at the granular level of individually constructed P2P Order trades, which is never deviated from.
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The internet’s global reach has provided the foundation for buyers and sellers to connect and trade directly between each other without recourse to a middleman (intermediary). That middlemen are no longer required to connect buyers and sellers, changes the foundational structure of markets, and with it the opportunity to transition markets from the 'bulk' traded institutional 'intermediated wholesale' construct to that of the new more efficient directly connected 'dis-intermediated P2P' one.
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Perfect Market Equilibrium facilitates this structural transition, in that its new absolute market price equilibrium ‘point’ which is never deviated from, is derived from directly executed P2P Order trades between individual parties over the internet. Valuation is control of the market, and from which other dependent services such as cross border payments are derived. If a new more efficient valuation system can be introduced, then not only can control of the market itself can be transitioned, but so can the dependent construct of cross border payments.
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Under this new valuation system, the market finds and instantly re-finds (adjusts to) new absolute equilibrium ‘price’ points, to always perfectly clear all individual P2P trades, as they are executed and without recourse to an intermediary. In effect, the market remains in a perpetual state of absolute equilibrium, to not only never encounter overall market surpluses and shortages, but not even at the granular P2P level of individually executed Order trades.
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The institutional market, as a result of being wholesale and intermediated, cannot find absolute market price equilibrium ‘point’ and always has surpluses and shortages.
How is Perfect Market Equilibrium achieved?
Perfect Market Equilibrium is achieved by changing the way market forces are transmitted to market price (rate) and also the manner by which market price (rate) itself is generated. And this with respect to the fundamentally different market structures of 'pre-internet intermediated wholesale versus post-internet dis-intermediated P2P'.
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Market forces under the existing pre-internet wholesale construct are transmitted through multiple intermediary layers, where institutional market makers, as the market’s buyer seller connective link, ultimately set Quoted market prices from Order Book buy sell positions. As a structure it progressively assembles individual retail Orders into ever larger bulk quantities at respective intermediated points (e.g. brokers), ultimately culminating in vast wholesale trades between institutional market makers at the market’s core. Global market prices under this pre-internet structure, are consequently set between the exclusive club of financial institutions, typically over Electronic Communication Networks (ECNs). Only they have access to the market’s core.
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The existing intermediated wholesale market can never accede to the higher state of Perfect Market Equilibrium in that, firstly as a wholesale construct, the precise market equilibrium point is lost within its nebulous bulk traded inter-institutional framework. And secondly, as an intermediated structure it has multiple price and risk transmission points, causing distortions and lags during adjustment, which results in surpluses and shortages. This destroys its ability to find and maintain Perfect Market Equilibrium!
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The new post internet dis-intermediated P2P construct inverts the pre internet intermediated wholesale construct, by developing the global reach and connectivity of the internet to now directly congregate retail buy / sell Order trades as global buy / sell communities at a new market's core, within new P2P configured Forex Trading Floors. Under this directly connected construct, the new buyer seller connective link is therefore the P2P Fintech Engine, into which Order trades are structured on a new individual P2P basis.
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In that the retail community now has direct access to the market’s core, divesting institutions of this exclusivity, market forces under this new construct can be instantly and directly electronically transmitted to price over a single point platform, rather than over an institutional network. Devoid of distorting intermediary agenting or wholesale structure transmission lags, there are consequently no delays between shifts in supply and demand and price adjustments. The two now move in absolute sync! And that it operates at the granular level of individually constructed P2P trades, means even the minutest of shifts are reflected in the adjustment of this new absolute market equilibrium price (rate). This is the structural basis upon which the higher state of Perfect Market Equilibrium is achieved.
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For Perfect Market Equilibrium to be acceded to, the P2P Fintech engine has to be able to perform what is called a ‘mechanism’ adjustment. It has to be able to factor and process transmitted market force data as trades are executed, whereupon instant ‘mechanism’ adjustments to new equilibrium price (rate) points are induced. As a new directly connected and undistorted global market pricing construct, it can thus value and adjust more efficiently than the institutional structure itself, with the added benefit of having none of its conventional downside of positional risk.
Whereas the conventional institutional 'middleman' sets rates as they buy from the seller to sell to the buyer, encounters positional risk, under the new direct buyer to seller data driven 'mechanism' construct, which simply sets and adjusts to new rates as trades are executed, there is no middleman margin and therefore no risk.
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It can only be through purely data driven Fintech mechanism based adjustments, that the precise absolute equilibrium point be achieved and maintained at all times. And this to establish a pure transmission of market forces between supply (seller) and demand (buyer) communities, reflected in price / rate. Any artificial intervention, be it on price / rate or an injected liquidity between buyers and sellers, destroys the purity of market force transmission and consequently, the absolute 'precision' of Perfect Market Equilibrium.
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More efficient and precise, it consequently provides for a transition from an intermediary traded risk / reward valuation structure to a new dis-intermediated traded neutral ‘mechanism’ based one which has NO risk as it values. And furthermore, in that valuation data is now directly sourced from a new globally traded ‘collective intelligence’ and instantly transmitted to new Perfect Market Equilibrium prices and rates, it is consequently, also more representative on the point of valuation and adjusts faster by dint of its new direct market force transmission over a single point platform.
Why existing P2P fiat marketplaces CANNOT transition valuation
Existing P2P Fiat money transfer platforms cannot transition valuation, nor find the higher state of Perfect Market Equilibrium for the reasons their founders have misunderstood where the new valuation point is in dis-intermediated P2P. This has led them to either incorrectly configure their P2P Fintech engines, as in the instance of Currencyfair, or fail to apply one at all, in the case of Wise.
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That different to the intermediated wholesale market, under dis-intermediated P2P, the new connective link between buyers (Demand) and sellers (Supply) is the P2P Fintech mechanism, means it is de facto the valuation point!
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However, mindsets steeped in the conventions of the institutional wholesale market implementing new P2P money transfer platforms, have mainly simply transposed existing instruments and methodologies, notably the institutional ‘Matching Engine’ which is NOT designed / configured to value, to the new valuation point of the fundamentally different structure of dis-intermediated P2P.
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First generation P2P Fintech (Algorithmic) ‘matching engines’ are a reconfigured adaptation and transposed version of the institutional wholesale trade ‘matching engine’ originally designed to ‘match’ wholesale trades typically over an institutional ECN (Electronic Communications Network). But rather than matching institutional wholesale trades over an ECN, the P2P version instead directly ‘matches’ individual buyer / seller Order trades over a single point platform.
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Instead of reverting to the seminal ‘Law of Supply and Demand' as the economic building block of markets, to configure an engine which drives ‘Price as a Function of Supply and Demand’, the transposed engine and consequent model they have come to apply is to inadvertently attempt to make ‘Price a Function of Price’! This not only incorrectly applies the Law of Supply and Demand, but effectively inverts it! Fiat P2P money transfer platforms, such as Currencyfair as a consequence, cannot perform the most basic feature becoming of a market, which is to generate their own dynamically adjusting market prices or rates.
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Financial institutions in the wholesale market are the valuation point in that they set prices, derived primarily from their Order Books, which are subsequently ‘matched’. The matching Engine itself thus does not value! It simply 'matches' rates or prices which have already been established by institutional Market Makers.
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Performance limitations of first generation P2P Fintech ‘matching’ engines, thus stem from their transposed and adapted configurational flaws, causing them to be 'static' models, unable to accommodate the highly dynamic nature of markets in which they are applied.
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Currencyfair: Not only can platforms such as Currencyfair not generate their own dynamically adjusting market rates, but perform poorly in that they always encounter matching rate imbalances, known as ‘mis-matches’. Their marketplaces, in a perpetual state of dis-equilibrium, consequently ‘stick’ if left to their own devices, in that there is always either an excess of unmatched buy or sell side marketplace Orders.
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They end up having to intermediate what is a dis-intermediated structure by injecting an externally sourced institutional liquidity to shore up their model's performance failings. This leads them to operate what might called a Peer-to-Principal model, in that buyer / seller Order trades are always executed into an intermediated 3rd party liquidity, rather than the congregated counterparty community’s Orders. They are thus not true P2P! And for this reason, amongst many others, can they not challenge the liquidity might and margins of the institutional market. They are not only dependent, but that they play by the same institutional rules, can never dislodged or replace it!
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Wise: The Wise platform does not 'exchange' currencies, but simply 'converts'. They state as much on their money transfer page; 'Total amount we'll convert' and further reaffirmed in their Customer Agreement document in 'Section 11, Currency Conversion'. In that they do not exchange, nor have a marketplace with a P2P Fintech Engine, means they are even further removed in their ability to generate their own rates or value.
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Wise have simply adopted a common ‘currency converter’ algorithm, which 'scrapes' exchange rates from a referenced rate provider such as Google, and applies them to their money transfers. And whilst advantageously, unlike Currencyfair, this circumvents the complexities and risks of having to go into and take positions within the institutional market, allowing them to outperform Currencyfair, their resulting model is to effectively create, what might be referred to, as a market anomaly!
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In that there is no actual buying, selling or exchanging of currencies, no Orders generated and no matching, the implications of this pure ‘conversion’ system, is that there is no transmission of market forces to rate! Cross border currency flows are never the same or constant! Wise, by dint of being a non rate transmissive ‘conversion’ system, end up having to manage ever and constantly discrepant escrow account currency ‘pool’ quantities into which funds are paid and out from, by sitting on them. If they were to instantly pay out, they would encounter a short fall of funds in either one of their escrow currencies account. By delaying payouts timeframes, they can build up escrow account liquidity buffers to replace what would be a naturally exchange rate equalising process.
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This not only delays their cross border money transfer service, but creates a new and different kind of systemic risk at the heart of the Forex market, in that as a market anomaly, they reverse the natural order of markets through the manipulation of supply and demand to fit exchange rates, rather than exchanges rates being the determinant. It is back to front, in that, as an analogy, they are attempting to make the cart pull the horse! The Wise founders, neither hailing from an institutional, nor economic background, but purely tech, have applied an ultimately logical, but ultimately systemically risk and flawed methodology to fiat cross border payments.
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Whilst Currencfair's trades, at least hedged in the institutional market, do consequently contribute to institutional currency exchange rate valuation, the Wise model by fully circumventing it, consequently does not contribute to exchange rate valuation, as a reflection of cross border monetary flows and their supply and demand. As an anomaly within the system, it consequently has an exchange rate distortionary effect!
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Both Currencyfair and Wise platform are consequently limited to money transfer, albeit each with its respective performance deficiency. Significantly neither are able to penetrate and disrupt the market from its core of Forex or Foreign Exchange valuation, to transition to the new more structurally efficient construct of dis-intermediated P2P.
A Next Generation P2P Fintech Exchange Mechanism: Breaking Free of the Institutional Market
The ability to accede to Perfect Market Equilibrium is derived from a Next (Second) Generation P2P Fintech Exchange (algorithmic) Engine. Not a transposed institutional Matching Engine, but rather conceived specifically for the new world of dis-intermediated P2P and its correctly identified valuation point, it applies the economic Law of Supply and Demand as its configurational building block. And this, from which new globally harnessed, directly data driven 'mechanism' based global market prices and rates are generated.
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The new P2P Fintech Exchange mechanism, can as a consequence, generate new more efficient 'precision and risk free' mechanism based global market prices and rates, as a direct 'Price' function of a globally harnessed and instantly transmitted global market Supply and Demand, to transition global Price Discovery and Forex market creation to the new more efficient construct of dis-intermediated P2P.
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Different to flawed first generation P2P marketplaces which can neither develop the global reach of the internet to harness and transmit global supply (sell) and demand (buy) market forces, as a new globally sourced collective intelligence, nor which their ‘matching’ engines are configured to accommodate and reflect, platforms operating the next generation P2P Exchange Engine, by contrast, can and does both.
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It might be argued, the real transformative value proposition of the internet lies not in the dis-intermediation of middlemen, but in the harnessing of global market forces over it. A new globally harnessed ‘collective intelligence’ derived from the valuation contributions of all buyers and sellers worldwide, rather than confined to a limited number of financial institutions, will always be more efficient and representative. Furthermore instantly transmitted to price, simply as the global collective come the new Exchange and execute trades on it, it is consequently a simpler, yet more efficient structure, which values more representatively and adjusts faster. It has no Quotes, just instantly generated actual market rates!
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And unlike P2P marketplaces operating First Generation matching engines which encounter performance ‘mismatches’, causing them to fall back into the hands of the institutional market, the Next Generation Exchange Engine by contrast, operating at Perfect Market Equilibrium, never encounters such issues, in that it perfectly 'self clears' all P2P trades at all times, at a precision level the wholesale market can never aspire to. It can consequently, fully develop the natural structural efficiencies and value propositions of dis-intermediated P2P to break free of the pre-internet institutional market.
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As a radically new data driven, mechanism based global market valuation, it thus novelly ‘self values and self floats’ new instantly dynamically adjusting market prices and exchange rates, simply as trades are executed, without recourse to an intermediary’s intervention or liquidity, the significance of which is set out below. And this to establish the framework for a new departure point and consequent evolutionary path.
Breaking Up the Power of the Wholesale market
The conventional intermediated concept of market liquidity is where 3rd party financial institutions, as liquidity providers, facilitate market buy and sell side trades as they set wholesale prices. The greater their traded volume, the tighter their margins and the greater the market liquidity, the more efficient the market is. Perfect Market Equilibrium dismantles and breaks up these established tenets and principles.
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That Perfect Market Equilibrium provides for perfectly cleared trades at all times at a new absolute market focal point, dispenses with the need for an intermediated 3rd party’s liquidity to facilitate buy and sell side trades. With buy sell trades now directly executed into each other, institutional control over the market is dismantled. And furthermore, breaking up a structure which progressively assembles individual Orders into ever larger wholesale trade sizes, to replace it with a directly traded individual buy sell Order construct, means conventional wholesale price size advantages no longer apply.
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Everyone in the market, regardless of Order size is placed on an equal footing, in that globally exerted market forces now directly driving valuation as a function of overall supply and demand, supersedes the power and impact of any one player. The structural power of the institutional middleman is broken up.
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Creating a new more efficient, but fully equalised, inclusive and meritocratic market and trading construct, the role and rate advantages of financial institutions are eviscerated and no longer apply, and also with it, the hegemony of the Dollar's liquidity depth and settlement power.
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The hegemony broken up, is not just that of the Dollar, but indeed, more significantly, that of the financial institution itself, to herald a new age, where the financial institution is no longer the agenting intermediary to global market valuation, nor the conduit of global monetary flows.
Just as globalisation has led rise to the inordinate rise to power of the financial institution within the international monetary system, so the advent of the internet, lends for the dismantling of this power, and its reversion back to basics, as a fractional reserve lender.
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And with it, the transition to a new more efficient and equalised 21st Century global economic system, where the fault lines driving towards ever increasing global inequality, ever greater economic migration, political extremism and social unrest are unilaterally and holistically addressed.
the concept of A new devolved Liquidity
Building on this dismantling of institutional control and power over global markets, that under this new true P2P Perfect Market Equilibrium construct, executed buy sell trades are now directly structured into each others congregated community Orders, without recourse to an institutional middleman's liquidity, effectively creates what might be considered to be a new devolved liquidity. Congregated buy sell community Orders can now be deemed to be liquidities, in that trades are executed into each other, rather than that of a facilitating 3rd party liquidity provider.
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And this changes the way price adjusts! Instead of being 'outputted' by financial institutions as Quotes, it is rather driven to adjust to new Perfect Market Equilibrium price points within the now globally sourced and congregated buy sell community liquidities. This not only creates a more resilient market structure, but one which also simply absorbs shocks, in that there is no conventional intermediated positional risk, nor performance requirement! Different to the intermediated institutional market, which concentrates power and wealth, and consequently risk, this new structure devolves power and redistributes wealth, devoid of risk. If there is no middleman buying from the seller to sell to buyer on a vast scale, then there can be no risk!
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It is a new systemically stable and considerably more resilient structure, which with no core risk, can never fail to perform!