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  1. #1

    Implementing "High Finance" in WoW - Part 1: Short Sales

    This was originally posted in the Wind Trader's Stormspire on 16th "November 2010. Moving it into the public forums for greater benefit and just an interesting/insightful read. - Sinshroud.

    If you look at the wealth distribution in society today, there can be considered three classes: working class, middle class and upper class. Clearly, in the real world, this is a massive oversimplification but it's still a semi-useful analogy on occasion.

    In wow, we have a similar stratification: regular players (Gevlon would call them M&S) who are the working classes. This group also includes most farmers. The defining charecteristic of this group is that they are driven by immediate needs with little thought to long term gain.

    The next "class" are the niche market crafters, flippers and a few farmers who come to dominate a niche area. This group can make a steady living without having to constantly grind every day to pay their repair bills. They have some thought for the long term, but typically it's only inside their own markets, whether due to lack of knowledge, time or capital. Their ability to take extreme speculative positions is also limited since they don't have the cash to lose if things go wrong.

    Finally, we have the gold barons. They are involved in every market and make their money mostly on the sheer volume of transactions that make a profit rather than hoping their one speculative investment makes them instantly rich.

    Anyway, back to my point: a lot of the wind traders on this forum are gold barons or close to becoming so. It is to these people that I want to suggest new ways of making money that don't revolve entirely around simply buying and selling items as a profit.

    Take short sales, for example: once you heard the news about the Razzashi Hatchling, you _knew_ the price would dive. Obviously, you dumped what you had but, if you were anything like me, you wished that you could do more than that.

    Enter the short sale. For those of you unaware, a short sale ("shorting") is where you bet on the price of a stock or commodity (e.g. a barrel of oil) going down rather than up. If you think the price will go up, you can just buy the stock. If you think it will fall, you short it - simple enough.

    Here is how it actually works:

    1. You _borrow_ the stock from your broker. (This implies they have it in stock already) with a promise to give the stock back later. The broker has your money, so they don't much mind loaning you the stock.
    2. You sell this stock on the open market and get, say $100.
    3. Time passes and the stock either goes down (you were right!) or goes up (boo!).
    4a. Now, it's time to give the stock back. To do this, you need to again buy it on the open market. If the market price went down (say it's now $75) you just made (100-75) 25 dollars!
    4b. Of course, it works the other way too - if the stock went up (It's at $150 now), you just lost $50 (100-150).
    5. You give the stock back to your broker and everyone is happy.

    How does your broker benefit? The simplest is that they charge you interest on your money. There may also be fees for shorting. If you use them to buy and sell, there are also brokerage fees. They also benefit from Gambler's Ruin through margin calls. (I'll explain that in another post). Anyway, the point is, shorting makes money for the house in the long run, although on any given even the house may lose.

    So, back to warcraft: I propose that gold barons consider becoming the house (the broker).

    How on earth could something like this work?

    1. Players deposit money with a gold baron (say 5000g)
    2. Players say "I want to short 1xRazzashi Hatchling for 1 month".
    3. Baron sells one of his hatchlings on the open market for 1c below the current market price. When it sells, this is the starting value. (Alternatively, the Baron can simply take the gold from their own accounts and pretend they sold one).
    4. Baron puts the sale price into the players account. The account becomes "locked" for withdrawals (to stop the player cashing out if things look bad).
    5. A month passes.
    6. Contract becomes due and the player can either hand the Baron a hatchling or can have him automatically buy the cheapest one on the open market.
    7. Players account becomes unlocked for withdrawals and they can take out their ill gotten gains (or losses).

    That's the basic transaction system.

    I recommend that players can only short something with a market value of 1/3 of the money in their account. Thsi protects the baron from up to 200% price appreciation if the player defaults (the month ends, the price for a hatchling went to 100,000g and the player refuses to pay up).

    For player security, both players should screenshot any money transfers and the actual agreement. The agreement should use very standard, obvious, language so there is no doubt about what was agreed upon.

    The way that I envision this working in practice is via either an in-game mod or a website (perhaps the site could even be hooked up to the remote AH) rather than done manually. Players could fund their accounts at any time by mailing the money to the baron.

    Oh, one more thing: how does the baron make money? The simplest way to make cash is that we would charge a percentage of the current market price as a fee to set up the contract. This percentage could depend on what we think the risk is. For example, if I (the Baron) already knew about the hatchling news, my percentage would be about 200%, meaning it would have to drop below 1/3 of the current value for you to make money.

    If you wanted to short something that I was sure was going to rise soon (say you wanted to short Argent Tournament Pets) then I'd probably only charge you 1%.

    Finally, for players, the GM's can step in and stop a scammer gold baron. The gold baron also presumably has a reputation to protect. So long as individual deals are small enough, there is no incentive for the baron to risk losing all of their customers over a single unpaid transaction when the player wins.

    So, now that we have a basic framework, what do you guys think? I understand that it's very different from the usual ways of making money and it sounds like a lot of effort in the beginning but I think with a good mod or website (I can write one) it won't actually be very hard to run.


    Other ideas that I'll talk about soon:

    Banking
    Pawn Shops
    Derivatives
    Debt collections (this one is fun!)
    Forex
    Last edited by Sinshroud; July 11th, 2011 at 08:06 AM. Reason: Forex

  2. #2
    Thorzek's Avatar
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    Fun idea but it involves trusting someone virtually unknown with money. You're counting on Blizzard supporting this from month-old logs and having an understanding of short selling - not gonna happen. We pretty much take part in short selling already anyway - anyone that maintains a large inventory does anyway. Great example and ironically using your item from above - I had a couple Razz hatchlings stockpiled for Cata. The new hits so I immediately take one from my stockpile and sell it for 5k. Take another, sell it for 4.8k A couple days later I bought three for 1k 1k and 800g. I know have an extra Razz banked plus a few k in my pocket. Prime time TLK I used to keep a bank tab of Abyss Crystals handy for making scrolls. When they spiked I sold from my reserves and when they went low I replenished - made nice coin shorting my inventory and made scrolls at the same time.

  3. #3
    I tend to do a version of short selling with any new materials that appear, in that unless i immediately need them i will sell them on and then buy them back on the AH as and when i need them, usually at a much lower price. It also has the advantage of freeing up storage space so a double win.

    On a more similar scale, when i was in my last proper guild i implemented a share system, where people could buy shares in my business, which i ran for a few months mainly as a way to help out guild members without them feeling like i am giving them charity and them wanting to pay me back.
    The main drawback i found was that i didn't really gain anything and probably ended up making less personally as i had to pay out a good chunk of my profits, which i could have made by myself without their investments.

    It would be good for people with limited personal capital to get themselves on the gold making ladder by giving themselves a bigger pool of gold to work with and build up their business quicker but if you have the capital to fund this yourself you are only really giving away your profits at the end of the day. Every copper you make for them is 1 less copper in your pocket.

    Overall, while a interesting idea this does rely a lot on trust as i doubt GM's would get involved in such a deal as it's a type of transaction they can't really prove one way or another, even with screenshots/chat logs.
    In a simplistic view it's a system of loaning which they do not support. It is slightly more complex but i would be very surprised if a GM would get involved in a situation like this and if they did it wouldn't surprise me if they just said swap back the initial investment as they would have no real way to prove what the end 'value' would be.
    You even run the danger of it being simply considered a scam if you get the wrong GM on the wrong day and your customer reports it as such.

    Personally i would avoid trying this with random people as it's just asking for trouble. If it's with people you trust enough.e.g. friends, it's generally easier just gifting them some gold and saving yourself all the hassle of working out who gets what. With my share system, not only did i likely make less gold personally, i spent more time making that gold as i had to deal with all the papaerwork.e.g. setting up and running spreadsheets, contacting people for various reasons etc...all extra things i wouldn't have to bother with if i was simply dealing with myself.
    Last edited by Thefluffyrocker; November 16th, 2010 at 02:47 PM.

  4. #4
    Lofty's Avatar
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    I'm intrigued. While the idea is brilliant and interesting, (sure beats AH camping) the audience is something that needs to be refined.

    How about running this for large hardcore progression guilds? LOTS of people will be re-forming for 10man raids, scaling down from 25s.
    Could that be a good audience for this, instead of individuals?

  5. #5
    Quote Originally Posted by Lofty View Post
    How about running this for large hardcore progression guilds? LOTS of people will be re-forming for 10man raids, scaling down from 25s.
    Could that be a good audience for this, instead of individuals?
    Good idea. I was planning on writing some followups, but perhaps I'll keep them in this thread.

    It may well be worth it to provide banking services to high end guilds. Especially loans. There are plenty of players that need loans day to day to buy the latest and greatest X on the AH, get their enchants, etc. This is especially useful for those people who just started gathering gold in Cata and don't have cash to level up their professions or get the latest enchants or whatever.

    Here is how banking could work:

    Talk to _high end_ guilds, the ones with reputations to protect, and tell them that you'll be willing to offer banking services to their members and get buy in from the guild leadership. Once you've set it up with them, have them post on their guild forums that you are available.

    Start small - a couple of thousand gold per member, and structure the loans in such a way that they are easy to repay. I strongly suggest that you make the terms very easy to understand. e.g.:

    A guild member borrows 2000g (any amount between 1k and 5k to start - bigger amounts may come later).
    Each week, they will owe you 400g.
    6 Weeks later, the loan is paid off and they can ask for another one.

    Obviously the numbers need tweaking - 400g profit doesn't seem like a lot, but perhaps in aggregate it could well be worth it. Do this for 100 players and the money starts to get worthwhile, especially with a custom mod to handle everything.

    The money can be available immediately if you are online or via mail if you are not online.

    With a mod, it's easy to calculate balance outstanding and who is on time/who is in arrears.

    People in arrears get a note in the mail, then a personal whisper, then start talking to the guild leadership about how they are making the guild look bad and finally you restrict the entire guild from being able to borrow until the debt is repaid.

    Is it riskless? No. But no lending is - all lending is based on credit worthiness and credit history. There is always a risk of default. The way that bankers have managed to avoid defaulters in the past is a mix of shaming them, legal sanctions and careful screening. Legal sanctions are hard (but theoretically possible on a PVP server) but the other two are quite easy.

    So, what happens if the entire guild defaults? This is much harder. It's quite unlikely, but certainly possible. You can try the GM route (good luck) but the better way is simply to make an example of them. Shame them publically, and for a long time. If you want, you could try to go further (this isn't EVE Online sadly) and do things like try to break up the guild by convincing others to poach key players (for example) but that seems more effort than it's worth. (Visions of paying the opposite side blood money for camping guild members seems interesting.)

    Then again, if you think the likelihood of default is high, don't do business with them. Remember - we are talking about high-end guilds that care about things like server rankings, not 500-member "lol star pony RAWR" guilds.

    It may well be a fun experiment and, hell, if you have a million in the bank, what else are you going to do with it?

  6. #6
    While an interesting idea, I agree with the doubt that Blizzard GM's would really support such a business venture. Sorting out a conflict in this situation would likely prove far too difficult for them. It's likely you could end up in a whole world of trouble if you end up doing this with someone who doesn't understand, and I think it's safe to say that this concept would be over more than a few heads.

    Personally, I wouldn't be up for attempting this. I would rather just give my friend some money, or loan them money with a flat interest on the total and a time limit to be repaid. However, I would likely just give them the gold, I can make it back easily anyway.

    But, again, it's a neat idea and if you can find people who can wrap their heads around the concept, more than a few might find it enjoyable to "play the market" in a different fashion, considering it is just game gold and not real money.

  7. #7
    I do feel like a big party pooper on this but even banking for a large well known guild is far from risk free. Even the most well know guilds can implode in a very short time and if they do your security has disappeared and your then left relying on individuals to pay back their loans.
    Also the more trustworthy a guild is.i.e. the more organised it is, the less likely they will actually need a banker as they will most likely already have a support system for their members.
    The whole principle is based purely on trust and you have no fallback if things go wrong which is a very likely occurrence as it is too easily abused.
    As you said, lending is about risk management and there is no risk management for this even when dealing with people you know quite well.

    Looking back at when i did my share system, apart from my guild knowing me very well, they all knew i was rich and was highly unlikely to steal their gold due to having no need to. They were also giving me their gold and my only risk was not making a profit. Overall that was very low risk on both sides.
    With this system they have no risk at all as your giving them gold (even more so if they don't really care) but your giving people gold who are so bad (or lazy) at making gold they need to loan it off you?!

    It's a fun idea but i would highly advise anyone against trying it. If you have the capital to bankroll a system like this then you already know gold is easy enough to make in completely safe ways.

  8. #8
    Thorzek's Avatar
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    If you want a finance business with a cut, look into funding X-faction gold trading. This is one thing I'm considering - I have around 1.1 million horde and 200k alliance so I could offer to do xfaction trading for 7%. If you buy, shuffle, and AH something that takes a 5% cut plus you have to find something that's profitable and that will sell fast so you don't lose deposit fees. The 2% premium seems like it would be well worth it to those that just don't want to mess with it. I'm concerned that too many people will want to go horde -> alliance though based on our server population and I have had a bugger of a time funding alliance. 200k is a decent buffer now but I just recently built back up to that - I had to bite the 15% bullet a few weeks ago when I was faced with a huge opportunity and no cash flow. This was on 90k too so I took a 13k+ hit.

  9. #9
    Sinshroud's Avatar
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    I would be interested to see what Game Masters would have to say about something like this. Perhaps when I'm finished updating my wow I will open a ticket and ask them what they think about the idea of loaning gold, if it's legal and whether or not there are any ingame rules/laws that can be enforced to ensure that the loan is repaid.

    Thorzek brings up a very good point, I believe this method original came from UO where there are a player who basically did that on every single server.
    It works well in wow too, especially now with the upcoming additions of Worgen and Goblins, people will want to reroll the opposite faction to check them out and they would love to be able to sent a couple of thousand gold to help support their lowbie.

    The Neutral Auction House takes a 15% cut of gold being sent across, so you then go and offer only a 10-13% cut. Not only are you offering a reduced rate but that 10-13% cut is also them paying you for the premium service of instant delivery hassle free. Neither of you need to even leave a Neutral City like Shattrath or Dalaran to complete the trade.
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  10. #10
    Thorzek's Avatar
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    Quote Originally Posted by Sinshroud View Post
    Neither of you need to even leave a Neutral City like Shattrath or Dalaran to complete the trade.
    Or a home city like Org or SW since the trading wouldn't be xfaction =P

 

 

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