Tracking Demand & Market Reset

The primary purpose of the Straato Market is to eliminate Market noise through what we call volatility encapsulation. In the stock market, small changes in supply and demand affect prices directly, contributing to short-term volatility. This price movement is essentially random and makes active trading very difficult. The goal of the Straato Market is to ensure that only significant changes in supply and demand affect the direction of price movement. So, instead of frequent, short changes in price movement direction the Straato Market facilitates that only longer or larger (and fundamentally less “random”) price increases and decreases occur. This is “volatility encapsulation” – grouping periods of positive and negative volatility into longer, separated intervals as opposed to rapid and intermixed bursts.

This allows traders to generate more reliable and consistent strategies, while essentially eliminating “noise” in the Market – any changes in the direction of price movement are indicative of larger Market sentiment, as opposed to the actions of individual Market participants.

This plays out very concretely in the Straato Market. As the market price of Straato increases, in accordance with the minimum price floor mechanism of the Offer Queue, aggregate demand for Straato will inevitably decrease. Similarly, if all traders stop selling Straato, supply will disappear. When demand or supply drops below a predefined, public (known by all traders) threshold, the Straato Market undergoes a “reset” to restore liquidity and restart trading. This reset is the only time at which price volatility switches directions. Each trading period, between consecutive resets, is called a “cycle” in the Straato Market. Cycles may be separated by short periods (1-5 minutes) of “pause” in the Market, during which trading cannot occur. This pause period is intended as time to evaluate positions prior to the start of a new cycle.

Tracking Demand: When does a reset occur?

In order to effectively implement volatility encapsulation in the Straato Market, the Market needs a way of tracking supply and demand. The Market measures relative supply/demand through a statistic calculated on the elapsed time between subsequent trades (purchases) and offers. We call this statistic the stabilized queue growth factor (sQGF) or, more colloquially, the “reset statistic.”

The sQGF or reset statistic is defined as (3B + S) / (3S + B). S is defined as the weighted average of time between offer actions on the Offer Queue. For example, if I list 3 Straato after an elapsed time of 2 seconds and then 5 Straato in 10 seconds, S would be equal to (3 2 + 5 10) / 8 = 56 / 8 = 7 (seconds). The B statistic is calculated similarly, but on the elapsed times between purchases.

If you look closely at the formula for the statistic itself, you should notice a few key features. As relative demand in the market decreases, the statistic increases. There will be more time between purchases and less time between offers, so B will increase and S will decrease. Similarly, as relative supply in the market decreases, the statistic increases. In this case, there will be more time between offers and less time between purchases, so B will decrease and S will increase. This statistic basically measures the relative speed of queue growth – the faster the queue is growing, the less demand is present in the Market. We add the S to the numerator and B to the denominator to provide a level of stability to the statistic, especially when the scaling between S & B varies significantly. The base statistic, however, is essentially just B / S and the multiplication by 3 ensures that this term still dominates. This formula also bounds the statistic between 0 and 3, allowing us to more easily generate appropriate boundary thresholds. This is where the “stabilized” part of the sQGF comes from.

Whenever the sQGF becomes higher or lower than the bounds listed in your Dashboard, the Market will undergo a reset. This is indicative of extreme lack of demand or extreme lack of supply in the market. During trading, the sQGF is generally quite volatile, as small changes in supply and demand do affect the sQGF. The sQGF essentially shields price direction from this volatility, thereby implementing the volatility encapsulation we have described.

In order to ensure that the Market is moving sufficiently quickly and to handle some edge cases for which the sQGF may not result in efficient resets, we also track the Queue Velocity, calculated as 60 / B and measured in minutes/trade. If the Queue Velocity drops below its governing public threshold (which is typically set very low), the Market has likely stalled or stagnated completely and a reset will be executed, regardless of the sQGF value.

These mechanisms are the only triggers for a reset in the Market. Both the sQGF and Queue Velocity are public at all times and ensure that the Market functions appropriately and fairly.

Reset Details & Market Cycles

When a reset is triggered in the Market, by the conditions described above, the current trading cycle ends and a number of actions occur in the Market.

1. The Offer Queue is immediately wiped and all pending offers are deleted.

2. The Straato Market is placed into “pause” mode for roughly 1-5 minutes, with the exact amount of time specified in your Dashboard. Pause mode is meant as a respite between Market cycles and should be used to evaluate your strategy. No trading, buying or selling, is allowed during pause mode.

3. The minimum price floor from the previous cycle is wiped – the new cycle will begin with no minimum price floor and the first Straato to be purchased will fix that price. This means that, prior to the first trade in the new cycle, offers may be placed at any price above $1. The new cycle may start trading at any price, below the previous peak price.

4. The market-making fee, described below, is assessed for all traders auto-joining the next cycle. This fee is assessed as a percentage of Straato assets owned by each trader.

5. The new cycle begins and trading restarts. Liquidity is restored in the Market. The cycle continues until a subsequent reset is triggered and the same reset process repeats. Straato is fundamentally a cyclical Market, by nature of volatility encapsulation.