Yesterday, Wall Street Journal published a report claiming that automated trading programs, or bots, are manipulating cryptocurrencies’ prices, which is due to the lack of regulation within the industry.
Everybody knows bitcoin's violent swings. What they don't know are the unscrupulous traders sometimes behind them. https://t.co/dLSqOCiLzi
— The Wall Street Journal (@WSJ) October 2, 2018
Last month, New York Attorney General Barbara D. Underwood stated that crypto exchanges were vulnerable to manipulation. Barbara D. Underwood said that “when any venue tolerates manipulative or abusive conduct, the integrity of the entire market is at risk.” This issue is currently actual as there are no rules to prevent them from conducting illegal trading and taking advantage of abusive trading strategies.
A bot (or automated trading software) is a program that does a task automatically, sometimes to simulate or replace a human. Bots allow traders to set specific rules for trade entries and exits, submit orders to an exchange, and then automatically perform them with computer at a very high speed. These bots are legal and can be found in traditional stocks and bonds markets.
As the WSJ explained, bots use the following strategy:
“The bot’s strategy was similar to ‘spoofing,’ a practice in which traders enter fake orders only to cancel them. The tactic, aimed at tricking other investors to buy or sell an asset by falsely signaling there is more supply or demand, was outlawed in U.S. stock and futures markets in 2010.”
Earlier this year, cryptocurrency hedge fund Virgil Capital suffered a “harassing bot” that targeted some ether trades and led to losses. Virgil was checking prices every minute looking for arbitrage opportunities with cryptocurrency prices. The hostile bot ordered to sell ethereum at a price lower than those offered by other sellers, prompting Virgil to buy the currency. Right before Virgil completed the purchase, the sell order was cancelled. As a result, Virgil posted buy orders that never got executed, which increased the price on other exchanges.
Such a practice of fake orders is called “spoofing.” And it is currently one of the major problems in the crypto industry. As co-founder of CoinList Andy Bromberg said, “this sort of activity is rampant in the market right now.”
The WSJ mentioned another example of crypto price manipulation. Bitcoin trader Kjetil Eilertsen developed Quatloo Trader program which turned out to be “the best market-manipulation tool in the world of crypto.” Using built-in “whale tools,” the progran performs some illegal strategies and facilitates market manipulation. Eilertsen explained it as follows:
“If everybody can manipulate, then nobody is manipulating. You can’t ban anything from people who are dedicated to doing something.”
According to the WSJ, nearly $90 million in illicit funds had been funneled through different crypto exchanges last week. Spoofing, or practice of using bots, is not the only manipulative trading strategy, but the most popular one. Another example is wash-trading, market manipulation in which an investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity in the marketplace.