A major investigation by the Wall Street Journal reveals the extent of market manipulation taking place at crypto trading venues.
In particular the WSJ story draws attention to the widespread use of bots to execute automated trades. Automated trading is perfectly legitimate but what isn’t is the “spoofing” that floods exchanges with bogus orders.
Shapeshift, is again in the frame as a magnet for nefarious players.
Financial authorities think as much as $80 million has been laundered on the exchange this year and the exchange provides clients with “anonymous” trading making it attractive to market manipulators as well as launderers.
Attack of the bots
The newspaper report cites the case of a crypto hedge fund and its minute-by-minute battle in crypto’s Wild West markets. Here’s the relevant excerpt:
Abusive bots are a fact of life for Stefan Qin, managing partner of Virgil Capital, an $80-million digital-currency hedge fund that runs its own bots on dozens of crypto exchanges world-wide. He said he engages in a constant cat-and-mouse game with enemy bots.
“We’ve had to build in error-handling functions to check for hostile and potentially illegal activities,” Mr. Qin said. “Such is the Wild West of crypto.”
Earlier this year, Virgil lost money on certain trades in ether after a “harassing bot” targeted the fund, Mr. Qin said. Ether is the second-largest cryptocurrency after bitcoin, measured by market value.
Here’s what happened: Mr. Qin’s fund specializes in arbitrage—spotting when a digital currency is priced differently on different exchanges, and quickly buying where it’s cheap and selling where it’s expensive. At the time, Virgil was checking for such discrepancies about once a minute.
Seconds before that periodic check, the hostile bot would post orders to sell ether at a lower price than other sellers. That would prompt Virgil to attempt to buy ether. But before it could do so, the bot would cancel its sell orders. Virgil ended up posting buy orders that didn’t get executed, briefly boosting the price of ether on some exchanges, Mr. Qin said.
Because of the general lack of vigorous surveillance of the markets and the unwillingness of the authorities to come forward with regulations, manipulators are getting bolder.
A product called Quatloo Trader is being hawked around by a Norwegian developer Kjetil Eilertsen. According to the WSJ, Eilertsen even proclaimed with pride its market manipulating potential. The report quotes him as saying Quatloo is “the best market-manipulation tool in the world of crypto”.
The “ping-pong” feature of the software lets traders buy and sell with themselves and others in a form of abuse known as wash trading, giving a false sense of market activity.
All this comes alongside the notorious pump and dump schemes found in crypto, often run of messaging app Telegram.
The Commodities Futures Trading Commission is investigating market manipulation at crypto trading venues but is yet to report.
Manipulation and poor oversight on exchanges also contributes to the arbitrage opportunities available, although these are not as prevalent as they were just a year ago in the bitcoin market.
Worries about crypto market manipulation is one of the obstacles in the way of the approval of a bitcoin exchange traded fund by the Securities & Exchange Commission.
Top 20 crypto assets, as at 12:30 UTC+1, 2 October 2018
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Gary has been writing about cryptocurrencies since 2013 and currently works as the cryptocurrency analyst at interactive investor, the UK’s second-largest online investment platform. Gary contributes for Coin Intelligence News in a personal capacity and none of his commentary should be considered investment advice. Gary is the winner of the ADVFN International Financial Awards 2018 Cryptocurrency Writer of the Year. Contact Gary on twitter at: @gary_mcfarlane