This paper jumps the gun. Detecting wash trading by examining distributions over rounded order prices is a strong and dubious claim for which they provide little evidence. The author's equate wash trading to non-rounded, clustered prices which really just indicates automated trading. Now automated ("bot") trading is a technology needed for exchanges wash trading sure, but not exclusive evidence of it.
Automated trading strategies (e.g., "grid trading") are really popular and there are many third party bot providers that integrate in multiple exchange APIs. Maybe the unregulated class of exchanges here just has more permissive APIs/automation than the regulated ones. Automated trading is still legitimate trading where a party puts their capital on the line.
I agree that the lack of rounding and trade size clusters is a likely approximate indicator of non-human orders. The presence of automated orders does not automatically mean there is fraudulent wash trading by the exchange.
The authors also do not cite previous research or evidence of their methodology working for traditional finance. It all makes for weak evidence of actual wash trading.
It's hard to tell wash trading from legitimate trading.
Because I'm involved with a committee on financial semantics I wound up learning a bit about swap trading. For stocks if you don't like your long or short position you can buy or sell and it is done.
In the case of swaps if you don't like your position you write another swap contract that is the opposite of the one you don't like. Both are on the books. In the 2008 crisis the size of outstanding swap liabilities dwarfed the real economy, but when you added them all up they mostly canceled out, both in the aggregate and for almost all of the market participants.
Looking at a situation like that which is hard to unravel people are going to make assumptions about the motives and ethics of the participants which are not substantiated.
I came looking for your comment. Someone applying some common sense to the “research”. Yet, the post has >400 points.
Feels like these days anybody can post a paper and get uncountable widespread with 0 backings for their research.
In nutrition this happens A LOT. Things like: “meat causes cancer in 70% of the population”. And then you read the paper and they did the study on 80 people between 60-90 years old. There’s just no scientific/statistic rigurosity.
Grid trading bots are all over the place. If you look at the crypto-trading subreddits you'll see plenty of posts about how some guy downloaded a bot and makes $300-500/day off of it. These are the new scr1pt k1dd13s; there are turn-key solutions to automate trading and anyone can use them.
It's also very disingenuous for the title to say that 70% of the volume in the top crypto exchanges is wash trading when the 70% category they define are the least popular exchanges (they rank worse than 960 on the finance section of similarweb).
Even more so because the regulated exchange and popular unregulated exchanges have 0 and mostly <20% wash trading respectively.
Their idea does show a pretty stark difference b/w "regulated" and "unregulated" exchanges, however, as would be expected if that activity is fraudulent in some way.
I recently had to go through extensive KYC/AML email conversations and phone calls with bunch of exchanges like Coinbase and others. Got me interested how wash trading could happen, when they were so strict with me, and which exchanges were investigated.
These seems to be the exchanges they investigated. Would be interesting to see a breakdown of percentage per exchange, as I still don't understand how wash trading can happen at Coinbase since they seem to be very strict.
What's a "regulated" exchange in this context? US Exchanges are "self-regulated" and ultimately answer to FINRA and the SEC. Any rules they publish must be approved by the SEC.
Theres no such process (AFAIK) with "panel A" firms. Its still the wild west.
Does regulation mean KYC for client onboarding? Thats a completely different thing. We're not talking about on-exchange trading rules and compliance monitoring in that case.
This is why Uniswap's data is much more valuable than centralized exchanges. On-chain trading permits a degree of transparency and trustworthiness not readily feasible with centralized exchanges.
Centralized exchanges are incentivized to doctor their data and lie about their volumes. The larger the volumes an exchange publishes, even if fake or gamed, the more relevant an exchange appears. Users must blindly trust whatever data exchanges can manufacture.
Uniswap charges a flat fee to every trade for all user. It's objective. There's no special back room trading rates, there's no ability to lie about volumes, there's no bonus for having high frequency bots trading. If you want objective data, Uniswap (and other on-chain exchanges) are truthful.
I'm generally pro-cryptocurrencies, but Uniswap definitly makes it harder to see wash trading, not easier. One wallet !== one person, while the regulated, centralized exchanges normally require you to answer bunch of questions and prove your identity because of KYC/AML laws, to guarantee that each participant is just that, one participant.
> Uniswap charges a flat fee to every trade for all user.
Not flat. It’s a percentage of the trade value.
> If you want objective data, Uniswap (and other on-chain exchanges) are truthful.
Transaction costs limit on-chain exchange wash trading to some degree, but it doesn’t stop price manipulation.
The on-chain aspect has an interesting issue in that during periods of high volatility the network itself gets both slower and more expensive, so an end user may not even get to execute a trade.
.... People pay for volume on uniswap daily ...
They just spin up new wallets and keep making them exchange very high amounts of a token (10ETH buy , 10 ETH sell , multiple times) (net expense is just the gas fees, but they get paid wayyy more to do this).
This is usually done to get uniswap traded tokens onto various trending lists like cmc , dextools , etc.
I’d say there is 10-40x the fraud on uniswap than on centralised exchanges, its just that on uniswap if you know where to look, you can transparently see the fake volume being created in front of you.
But for human traders, it can be tricky sometimes.
> The larger the volumes an exchange publishes, even if fake or gamed, the more relevant an exchange appears.
Only to unsophisticated traders, since past volume (liquidity) isn’t worth anything right now. What you really want to look at is market depth, ie. the quantity of outstanding open orders in the order book.
> Users must blindly trust whatever data exchanges can manufacture.
Contrary to past volume, open order book orders need not be trusted. Users can test this figure by executing a market order against it and observing the execution price. If there’s always a discrepancy between the two then either the exchange is lying about its order book depth or is susceptible to front running.
Many actors (including core devs) in the Ethereum (and other crypto) ecosphere see front running (known as MEV) and the payment for protection thereof (known as flashbots) as a "feature" so it's no wonder that other "creative trading techniques" run rampant.
It seems like the reason for every financial regulation in traditional banking is rediscovered in the crypto space just much faster.
There's a lot of uninformed takes in this thread, but this really takes the cake. There is literally nobody in the Ethereum space who sees MEV as anything other than rent extraction.
Flashbots' mission is for MEV to disappear. They're doing that by making it a more open process and to prevent MEV extraction from making the chain unusable via high gas fees.
Flashbots RPC exists as a feature because private txPools/RPCs are the only way to be absolutely sure your transaction won't have MEV extracted from it. If Flashbots wanted more MEV, they would only allow transactions via Flashbots RPC that cannot be MEV extracted.
By allowing MEV-extractable transactions on Flashbots RPC, they effectively reduce the amount of MEV that is mined.
This is great knowledge. People should not be investing based on what's popular or what is being traded. Better hold than gamble. Monetary speculation should be dumb in a sound money system
Extremely sceptical that the volume is fake in the largest exchanges. You can see it's real for yourself by putting an order in the book and simulating when it should be filled and compare that to the actual fill. You'll see that they line up closely for the large exchanges which is strong evidence that the volume is real.
There's also "legal" wash trading, e.g. the same institution/person putting in large BTC spot buy orders and then shorting the BTC future. This is how companies like crypto.com, celsius, blockfi, etc are now able to give investors 8%+ on their USDC because the investors need the cash for expensive futures contracts. The companies loan the cash out to hedge funds at high interest rates, take a cut, and give the rest to you.
Wash trading would be less of a problem if there was an independent way of valuing the asset, and we didn't derive our 'value' of the asset from what 'the last guy traded at'.
It's an inherent, infallible weakness of the type of asset.
I can't fathom how we haven't arrived at the general consensus that it's just a big scam.
I suggest that large portions of our economy depend on hype.
People Magazine generally won't say hugely negative things about celebrities, because celebrities are their currency, it's what they are selling. They're selling the illusion of celebrity, and they work with press agents etc. to concoct all of it. Talking any kind of 'reality' would be detrimental to their core business.
In much the same way, the press, including the Tech Press relies on a kind of naive, hopeful, optimism, blended with the dream of riches, or at least for others. The 'drama' of Musk, Zuck etc. keeps the clicks moving.
So this implies that the crypto markets are actually far less liquid than the trade volume implies. Suddenly those massive 10% +/- fluctuations in a day make a lot more sense.
Yeah, but everyone already knew that unregulated exchanges are faking their volumes. This isn’t news to anyone who has the slightest clue about cryptocurrency markets.
This is one of the few things about cryptocurrency markets that isn’t being disputed by anyone.
It's not just that, though. The markets aren't particularly liquid, and there isn't much rational basis for any particular price, and a lot of the real trades are being performed by irrational day-traders or poorly designed algorithmic traders.
It's all of these elements together that add up to the ridiculous volatility you see in these markets.
How exactly would someone distinguish wash trading from legitimate trading? Someone could just be generating volume from one account, or legitimately swing trading.
The only way I can see to distinguish it is if there are fees to making too many transactions per week. Like a "free tier" of transactions and then you pay if you want to transact a lot. That's the proper way to charge fees for mainstream payment networks, btw, rather than how they do it now. Anyway, then the problem becomes how do you mitigate sybil attacks.
Wash trading is a bug in the SYSTEM, and it should be the designer's responsibility to prevent it, not the government's. But the SYSTEM designers don't necessarily WANT to fix it, anymore than they want to fix sybil attacks when they're growing (Twitter or YouTube in startup phase being able to detect and deplatform oodles of new active accounts or content, is against their incentives to attract more money by reporting higher numbers, even if they are bots and illegally uploaded content). Same here.
Spoofing, wash trading, etc have always been common in crypto. Market microstructure is much more adversarial than most markets. If you have an automated strategy that uses and assumes orderbook data and execution data accurately represents market conditions, you will lose your money.
Most exchanges will have "liquidity partners" who have better fee structures, possibly even zero fees. Most of these arrangements are not publicly disclosed. It's also commonly possible to open an order and then trade into your order yourself, although I haven't checked in quite a while and controls may be better now. (Doubt it.)
On a macro level, all this is mostly meaningless, and just a reason everyone ignores volume numbers for these exchanges. There's no reason for this net-neutral trading to affect market prices outside a second/minute time scale.
I have used sniper software such as https://cmcsnipe.com/ and the ease of use of web3 has allowed automated trading to be taken to the next level. Not surprised that so much fake volume exists when it is so easy to create.
Now for the paper on NFT’s being used ONLY for money laundering. Then hopefully I won’t have to listen to someone talk about how much money other people are making. With NFT you can get any illegal income into the country. Keep your illegal funds outside. Go to your country and make an NFT thats “worth” 1 million dollars. Go out of your country and buy it. Congrats u just made art and washed 1 million. Yes a very simple example but still… No jpegs are not being sold for thousands of dollars for legitimate speculation.
> According to CoinMarketCap, the distribution of institutional investors is primarily correlated
with the exchange volume than its regulatory status. We also find no significant difference regarding
the volume and distribution of transactions on regulated exchanges compared to unregulated
exchanges around the time they became regulated. For example, Coinbase received Bitlicense in
2017. But there is no exodus of traders. If anything, its volume grew significantly.
Does anyone have any thoughts on why or how this is the case? I'm having trouble wrapping my head around how there is no departure if fraudulent trading is so rampant pre-regulation. I suppose it's worth noting that this largely seems to be speculation on their part anyway. Their data sample is comprised of only roughly one quarter of 2019. Meanwhile, Coinbase received their bitlicense in 2017. It's unclear to me how they can even be sure of the claim they're making at all. I wish they had included a citation here.
The paragraphs following appeal to Benford's law and Power law to explain away any concerns, but it's also unclear to me how it's directly applicable. The premises seem sound, but the conclusion doesn't seem all that cogent to me.
I think their expectation that real traders would use rounded numbers overlooks that crypto is hyper fractionalized. If someone is exiting their Doge position they're not going to use a rounded number as fee's are paid in a % of that crypto.
[+] [-] gillesjacobs|4 years ago|reply
Automated trading strategies (e.g., "grid trading") are really popular and there are many third party bot providers that integrate in multiple exchange APIs. Maybe the unregulated class of exchanges here just has more permissive APIs/automation than the regulated ones. Automated trading is still legitimate trading where a party puts their capital on the line.
I agree that the lack of rounding and trade size clusters is a likely approximate indicator of non-human orders. The presence of automated orders does not automatically mean there is fraudulent wash trading by the exchange.
The authors also do not cite previous research or evidence of their methodology working for traditional finance. It all makes for weak evidence of actual wash trading.
[+] [-] PaulHoule|4 years ago|reply
Because I'm involved with a committee on financial semantics I wound up learning a bit about swap trading. For stocks if you don't like your long or short position you can buy or sell and it is done.
In the case of swaps if you don't like your position you write another swap contract that is the opposite of the one you don't like. Both are on the books. In the 2008 crisis the size of outstanding swap liabilities dwarfed the real economy, but when you added them all up they mostly canceled out, both in the aggregate and for almost all of the market participants.
Looking at a situation like that which is hard to unravel people are going to make assumptions about the motives and ethics of the participants which are not substantiated.
[+] [-] santiagobasulto|4 years ago|reply
Feels like these days anybody can post a paper and get uncountable widespread with 0 backings for their research.
In nutrition this happens A LOT. Things like: “meat causes cancer in 70% of the population”. And then you read the paper and they did the study on 80 people between 60-90 years old. There’s just no scientific/statistic rigurosity.
[+] [-] nostrademons|4 years ago|reply
[+] [-] yrral|4 years ago|reply
Even more so because the regulated exchange and popular unregulated exchanges have 0 and mostly <20% wash trading respectively.
[+] [-] KarlKemp|4 years ago|reply
[+] [-] Closi|4 years ago|reply
[+] [-] MuffinFlavored|4 years ago|reply
Why? After buying and selling side fees, is it easy to make a profit in an automated way with crypto?
[+] [-] mgh2|4 years ago|reply
[+] [-] capableweb|4 years ago|reply
These seems to be the exchanges they investigated. Would be interesting to see a breakdown of percentage per exchange, as I still don't understand how wash trading can happen at Coinbase since they seem to be very strict.
[+] [-] loeg|4 years ago|reply
Coinbase isn’t one of the unregulated exchanges.
[+] [-] avnfish|4 years ago|reply
Binance, for example, is measured at 46%. Typically the lower tier exchanges have higher levels of measured wash trading.
[+] [-] arez|4 years ago|reply
[+] [-] anonu|4 years ago|reply
Theres no such process (AFAIK) with "panel A" firms. Its still the wild west.
Does regulation mean KYC for client onboarding? Thats a completely different thing. We're not talking about on-exchange trading rules and compliance monitoring in that case.
[+] [-] austinheap|4 years ago|reply
[+] [-] ur-whale|4 years ago|reply
I'm not entirely sure how KYC/AML are related to wash trading ...
In other words: how is the amount of checks they impose on their customers related to what goes on in their trading engine?
Or do you assume that because they're very strict on one thing necessarily implies they're strict everywhere?
That's quite a stretch.
[+] [-] bduerst|4 years ago|reply
[+] [-] cdiddy2|4 years ago|reply
[+] [-] Zamicol|4 years ago|reply
Centralized exchanges are incentivized to doctor their data and lie about their volumes. The larger the volumes an exchange publishes, even if fake or gamed, the more relevant an exchange appears. Users must blindly trust whatever data exchanges can manufacture.
Uniswap charges a flat fee to every trade for all user. It's objective. There's no special back room trading rates, there's no ability to lie about volumes, there's no bonus for having high frequency bots trading. If you want objective data, Uniswap (and other on-chain exchanges) are truthful.
[+] [-] capableweb|4 years ago|reply
[+] [-] koolba|4 years ago|reply
Not flat. It’s a percentage of the trade value.
> If you want objective data, Uniswap (and other on-chain exchanges) are truthful.
Transaction costs limit on-chain exchange wash trading to some degree, but it doesn’t stop price manipulation.
The on-chain aspect has an interesting issue in that during periods of high volatility the network itself gets both slower and more expensive, so an end user may not even get to execute a trade.
[+] [-] teitoklien|4 years ago|reply
This is usually done to get uniswap traded tokens onto various trending lists like cmc , dextools , etc.
I’d say there is 10-40x the fraud on uniswap than on centralised exchanges, its just that on uniswap if you know where to look, you can transparently see the fake volume being created in front of you.
But for human traders, it can be tricky sometimes.
[+] [-] chizhik-pyzhik|4 years ago|reply
[+] [-] latchkey|4 years ago|reply
[+] [-] runeks|4 years ago|reply
Only to unsophisticated traders, since past volume (liquidity) isn’t worth anything right now. What you really want to look at is market depth, ie. the quantity of outstanding open orders in the order book.
> Users must blindly trust whatever data exchanges can manufacture.
Contrary to past volume, open order book orders need not be trusted. Users can test this figure by executing a market order against it and observing the execution price. If there’s always a discrepancy between the two then either the exchange is lying about its order book depth or is susceptible to front running.
[+] [-] makotobestgirl|4 years ago|reply
[+] [-] Vespasian|4 years ago|reply
Many actors (including core devs) in the Ethereum (and other crypto) ecosphere see front running (known as MEV) and the payment for protection thereof (known as flashbots) as a "feature" so it's no wonder that other "creative trading techniques" run rampant.
It seems like the reason for every financial regulation in traditional banking is rediscovered in the crypto space just much faster.
[+] [-] bsamuels|4 years ago|reply
Flashbots' mission is for MEV to disappear. They're doing that by making it a more open process and to prevent MEV extraction from making the chain unusable via high gas fees.
Flashbots RPC exists as a feature because private txPools/RPCs are the only way to be absolutely sure your transaction won't have MEV extracted from it. If Flashbots wanted more MEV, they would only allow transactions via Flashbots RPC that cannot be MEV extracted.
By allowing MEV-extractable transactions on Flashbots RPC, they effectively reduce the amount of MEV that is mined.
[+] [-] lekevicius|4 years ago|reply
[+] [-] arberx|4 years ago|reply
Good news: it's getting better. Bad news: still very high.
[+] [-] sonthonax|4 years ago|reply
I've worked at an above board HFT with a big crypto desk, and this happened constantly.
[+] [-] cblconfederate|4 years ago|reply
[+] [-] csee|4 years ago|reply
[+] [-] sabujp|4 years ago|reply
[+] [-] SilasX|4 years ago|reply
[+] [-] jollybean|4 years ago|reply
It's an inherent, infallible weakness of the type of asset.
I can't fathom how we haven't arrived at the general consensus that it's just a big scam.
I suggest that large portions of our economy depend on hype.
People Magazine generally won't say hugely negative things about celebrities, because celebrities are their currency, it's what they are selling. They're selling the illusion of celebrity, and they work with press agents etc. to concoct all of it. Talking any kind of 'reality' would be detrimental to their core business.
In much the same way, the press, including the Tech Press relies on a kind of naive, hopeful, optimism, blended with the dream of riches, or at least for others. The 'drama' of Musk, Zuck etc. keeps the clicks moving.
[+] [-] rossdavidh|4 years ago|reply
[+] [-] phillnom|4 years ago|reply
[+] [-] biddit|4 years ago|reply
[+] [-] NikolaeVarius|4 years ago|reply
[+] [-] ryanlol|4 years ago|reply
This is one of the few things about cryptocurrency markets that isn’t being disputed by anyone.
[+] [-] duskwuff|4 years ago|reply
It's all of these elements together that add up to the ridiculous volatility you see in these markets.
[+] [-] unknown|4 years ago|reply
[deleted]
[+] [-] EGreg|4 years ago|reply
The only way I can see to distinguish it is if there are fees to making too many transactions per week. Like a "free tier" of transactions and then you pay if you want to transact a lot. That's the proper way to charge fees for mainstream payment networks, btw, rather than how they do it now. Anyway, then the problem becomes how do you mitigate sybil attacks.
Wash trading is a bug in the SYSTEM, and it should be the designer's responsibility to prevent it, not the government's. But the SYSTEM designers don't necessarily WANT to fix it, anymore than they want to fix sybil attacks when they're growing (Twitter or YouTube in startup phase being able to detect and deplatform oodles of new active accounts or content, is against their incentives to attract more money by reporting higher numbers, even if they are bots and illegally uploaded content). Same here.
[+] [-] tyrfing|4 years ago|reply
Most exchanges will have "liquidity partners" who have better fee structures, possibly even zero fees. Most of these arrangements are not publicly disclosed. It's also commonly possible to open an order and then trade into your order yourself, although I haven't checked in quite a while and controls may be better now. (Doubt it.)
On a macro level, all this is mostly meaningless, and just a reason everyone ignores volume numbers for these exchanges. There's no reason for this net-neutral trading to affect market prices outside a second/minute time scale.
[+] [-] greatjack613|4 years ago|reply
[+] [-] bobobob420|4 years ago|reply
[+] [-] CSSer|4 years ago|reply
Does anyone have any thoughts on why or how this is the case? I'm having trouble wrapping my head around how there is no departure if fraudulent trading is so rampant pre-regulation. I suppose it's worth noting that this largely seems to be speculation on their part anyway. Their data sample is comprised of only roughly one quarter of 2019. Meanwhile, Coinbase received their bitlicense in 2017. It's unclear to me how they can even be sure of the claim they're making at all. I wish they had included a citation here.
The paragraphs following appeal to Benford's law and Power law to explain away any concerns, but it's also unclear to me how it's directly applicable. The premises seem sound, but the conclusion doesn't seem all that cogent to me.
[+] [-] nabla9|4 years ago|reply
[+] [-] Cypher|4 years ago|reply
I think their expectation that real traders would use rounded numbers overlooks that crypto is hyper fractionalized. If someone is exiting their Doge position they're not going to use a rounded number as fee's are paid in a % of that crypto.