PancakeSwap’s Price Impact Problem: How Does the Error Arise?
PancakeSwap, the popular breakfast chain that charges customers by weight, recently found itself in hot water when it was discovered that some of its scales were producing inaccurate readings. The error arose because the scale showed different weights depending on how you stepped on it—if you stood still, the scale would give one measurement, but if you stepped with your right foot and then you’re left, it gave another measurement.
What exactly is a price impact error?
PancakeSwap‘s Pricing Problem: How Does the Error Arise: PancakeSwap’s Price Impact Problem – What Exactly Is a Price Impact Error?: PancakeSwap’s Pricing Problem: How Does the Error Arise?:
PancakeSwap’s Price Impact Problem – What Exactly Is a Price Impact Error?: PancakeSwap’s Pricing Problem: How Does the Error Arise?: pancakesswap price impact error example, what is price impact error in pancakes was, how does pancake swap pricing error occur, pancake swap pricing error definition.
What do the errors look like?
The two errors take advantage of the same problem. One can be found in a lab, the other in a virtual game. In both cases, the prices are set incorrectly. In the lab test, marketers at PancakeSwap hire an advertising agency to increase their number of customers by 20% over three months.
On average, they believe it will cost $10 to get each new customer and that each customer will spend $50 per month for three months for a total of $450. The agency says it can do the job for $200 and commissions from previous clients show that they have averaged a 25% boost with every campaign so far.
But in practice, they only get a 6% increase and after three months have spent $590 instead of $450. Why is there such a large discrepancy between forecast and outcome? The agency made two errors.
First, they set prices that were too high – but instead of raising them to bring them closer to PancakeSwap’s target, they used their average figure of 25% to extrapolate what each client would need to pay.
What are some causes for these errors?
Price Impact Problem: Price impact is the amount of price movement that results from placing a large buy or sell order. A single market order can move the price of several pennies, especially in thinly traded markets. Price impact errors occur when the system assumes prices will move much more than they do.
This type of error usually occurs at the opening, just as trading begins for a new day. If you place an unusually large order at the open, then all orders currently on the book may be canceled, causing your trade to fail.
The causes of price impact errors vary depending on what kind of trade you place. An exchange with an order book that gets scrambled by large orders may have technical problems. A market maker facing a flood of small orders in illiquid stocks may try to cancel your orders to avoid being stuck with too many shares at one price.
Large trades placed near closing time can also cause an error if sellers want to lock in their profits before leaving for home, or buyers are anxious about their positions expiring out of the money.
What do I need to watch out for as an investor?
When you’re considering investing in a company, you’ll want to dig into the numbers and find out if it’s worth it. The PancakeSwap situation is a good example of something you’d want to keep an eye out for:
A glitch that causes the price of a company’s stock to be set at the wrong level for long periods. Not only does that make any investment in that company potentially very risky,
but when it becomes clear there was an error, the investor might end up losing money on the deal. It might seem unlikely that software would allow such an error, but all sorts of glitches occur, from simple typos made during data entry to errors caused by upgrades or external programs.
As an investor, you’ll want to take time to review a company’s SEC filings regularly, checking for potential problems or signs of progress. This is a tedious process that can take time and effort, but it can pay off in terms of helping you make better investment decisions.
You may even find errors that could help you invest in stocks ahead of them becoming viable investments, especially if they’re not announced publicly—for example, through regulatory filings——or fixed before other investors notice.
It’s still important to look at a company’s financial statements for all sorts of factors beyond price impact bugs though.
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