Many experts are convinced that the under-regulated cryptocurrency market is dominated by trading bots that significantly affect pricing. This is reported by the Wall Street Journal.
Algorithmic trading is extremely common not only in the traditional but also in the cryptocurrency market, which, according to financial regulators, is highly susceptible to manipulation. Arguing that the latter is the reason, US Securities and Exchange Commission (SEC) rejects applications for the launch of Bitcoin-ETF.
According to the co-founder of CoinList, Andy Bromberg, over time the problem becomes more urgent, acquiring global proportions.
One bot can manipulate the whole market
Managing partner of the hedge fund Virgil Capital, Stephen Keane, noted that his company uses its own-developed software to counteract “enemy” bots on dozens of cryptocurrency exchanges around the world. Some time ago, a certain “bot-terrorist” delivered a lot of trouble to the company, because of which Virgil Capital suffered losses on transactions with Ethereum.
According to Keane, his company’s software tracked cryptocurrency prices to identify arbitrage opportunities every minute. The “enemy” bot placed orders to sell at a reduced price, pushing Virgil to buy. However, immediately before the implementation of the transaction, this bot removed the sell orders. As a result, the program has piled up purchase orders that promote price increases on a number of exchanges.
The process of placing fake orders and their subsequent cancellation is known as spoofing. It creates the illusion of excessively high demand or supply in the market, misleading traders.
There are supporters of manipulation
Some ardent opponents of cryptocurrency market regulation argue that there is nothing wrong with market manipulations, and even openly support such actions.
So, trader Kjetil Eilertsen created the Quatloo Trader program which is positioned by him as “the leading tool for market manipulation”. In a conversation with the WSJ, he noted that there is no point for regulators to prohibit market manipulation. Instead, it is better to provide small traders with advanced tools to manipulate the market. According to Kjetil, this somewhat equalizes the capabilities of its various participants.
“If everyone manipulates, no one manipulates,” Eilertsen said, sharing his original idea.
Bots are the basis of Pump & dump schemes
Trading bots often play a key role in Pump & dump schemes, prompting crowds of inexperienced market participants to buy on highs.
The program Quatloo Trader has a kind of “tool for whales”, which allows you to implement “illegal strategies.” One of the functions is the so-called “ping-pong”. It enables users to carry out buy/sell transactions with themselves, creating the illusion of rapid trade in the market, as well as artificially overestimating trading volumes and asset prices. Such operations are called “wash trades” and are prohibited in traditional financial markets.
Last month the New York State Attorney General announced that Bitcoin exchanges were subject to market manipulation.