Investors are aware of how sharp and unpredictable the movements of the crypto market can be. What many do not know is that behind these moves are often software algorithms used by unscrupulous traders to manipulate the market, writes The Wall Street Journal.
For regulators, the manipulation of the crypto-market is becoming an increasingly worrying trend. Even for some of the most zealous fans of digital money this issue is becoming a problem.
The US Securities and Exchange Commission has refused to register several stock-marketed funds in summer with this argument - the danger of malicious manipulation of certain crypto-points and the resulting risks to investors.
Automated billing programs, also known as bots, have long existed in most financial markets. They can be used and very appropriate without violating the rules.
Traders can purchase them for the developers of this type of software, and they can also develop their own algorithms.
The problem with the crypto market is that there is no level of control required. In developed markets, such as the New York Stock Exchange, for example, there is ongoing monitoring of orders and their execution, with the least suspicion of market manipulation, the regulator can intervene and punish violators.
However, most crypto bots do not have such mechanisms, and regulations are minimal if they exist at all. As a result, "bots" can manipulate market movements on a giant scale, experts warn.
Stefan Quinn is Managing Partner of the hedge fund Virgil Capital, which manages $ 80 million of cryptoactives. He tells WSJ that the company uses its own software algorithms and is in constant play of "cat and mouse" with "enemy" bots.
Earlier this year Virgil lost a large sum of money as a result of such a malicious attack. The Quinn Fund is specialized in so-called "arbitrage deals". He monitors the discrepancies in the price of a crypto of the various exchanges, buying where it is cheap and selling on the platforms where it is expensive. Algorithms check for such "imbalances" once per minute.
In the present case, the hedge funds systems detect a difference in quotes of the second-largest Ethercap market after Bitcoin. Seconds ago, the "enemy" bot has launched several orders for sale below market price.
This signals the purchase of Virgil's systems. However, seconds before the transaction, the counterparty cancels its orders and Virgil's orders are still outstanding. Thus the price of Ether on the platform is artificially raised on some of the other exchanges for a short period of time.
