Capital will always flow to where it is treated best. Of that I have no doubt. When talking about market manipulation, the question becomes where is the intersection between the rules of the exchange and trading volume?
Practices like Spoofing, Tape-Painting, Stop-Loss Raiding and the like are as old as markets themselves. With each new technological advancement, the way these techniques are implemented changes, but the behavior itself is exactly the same.
As does the goal: to shake up the markets and gain an advantage through fraudulent activity.
On Wall St. these practices are de rigeur and the exchanges refuse to clamp down on them. The large money center banks control the exchanges and are also the market makers on these exchanges so they are incentivized to keep these practices alive to drive retail investors away.
I Spoof Your Milk Shake
In short, the NYSE, NASDAQ and COMEX are not going to change. No amount of lobbying on our part will persuade the SEC to alter the rules to level the playing field for all traders.
This is why non-algorithm trading volume has all but disappeared on these exchanges. It’s also why the markets are becoming more and more fragile by the day because of the sheer level of coordination of action between the various computers.
Zerohedge has an article on this behavior invading the cryptocurrency trading markets. One-part history lesson about what happened on Mt. Gox in the ‘before time’ and one-part cautionary tale. It’s a good read.
As noted above, spoofing is actually illegal – as ultimately the trader has no intention of ever executing the publicized trade – but as Bitcoin markets are largely unregulated, it’s a very common practice.
What is unusual in this case is the nearly unlimited bankroll that Spoofy (the suspected evil-doer – TL) has at his disposal: He regularly places orders approaching $60 million.
Even more unusual is that, as cointelegraph reports, most of Spoofy’s activity occurs on a single exchange: Bitfinex. This exchange came under fire earlier this spring when Wells Fargo cut off their banking ties. As a result, it’s virtually impossible to deposit fiat on Bitfinex without going through intermediaries.
Yet unlike most Bitfinex traders, Spoofy appears to have special privileges, and has massive sums of both fiat and Bitcoin at his disposal on that exchange, likely one of the only traders who does.
Legal, illegal? Pfeh.
Spoofing happens all the time on the NYSE. We all know it. And the SEC selectively prosecutes someone every so often for PR purposes to keep the rubes awake enough to not complain too bitterly, bite down on that juicy steak, go back to sleep and keep putting money in their 401-Ks.
That said, I’m not here to eternally complain about this. I frankly could care less. The exchanges are rigged and I’m not going to play their games.
I’m here to tell you that there is a limit to what the market will tolerate in the crypto-space.
In the ‘real world’ of high finance the exchanges are protected by the SEC and the U.S. government. Regulation keeps competition off the playing field. Startup costs for a new exchange alone are enormous and then there is the competitive hurdle to get over if your exchange has tighter rules which will absolutely keep a lid on volume, profit and marketshare.
In the crypto-space that barrier to entry for building a new exchange is lower. There is no pain to move money from one exchange to another. It’s a cheap blockchain transaction.
Ever try moving from one brokerage account to another? It’s a nightmare…. It’s designed that way to keep you right where you are.
Is the barrier to entry for a crypto-exchange lower as a percentage of potential revenue than a real exchange? I don’t know.
But what I do know is this, and it’s what everyone in the securities-trading industry knows.
Placing a fee to place and cancel an order on the exchange is the way to stop spoofing. Period.
Spoofing occurs because there is no risk to the spoofer. They place orders that are never intended to be filled and lift them as a block the second it looks like they could get hit. It’s a practice done to move price without any skin in the game.
It’s fraud. But it’s nearly impossible-to-control fraud.
And then it can only be punished in arrears. Rarely are people made whole after the fact, if ever.
I’m not advocating for anything new. Critics have been begging for this in the capital markets for years to end the practice.
But, as I said, when the exchanges are the market makers are the spoofers and all of them own the regulators in D.C.?
Who Watches the Watchmen
So, Bitfinix may or may not be directly complicit in L’affair Spoofy as Zerohedge suggests but all the exchanges that do not charge for placing an order are indirectly.
And I note having just opened an account there, BitShares’ OpenLedger exchange they charge the same price for placing an order as they do canceling one.
Placing an order on OpenLedger happens on the BitShares blockchain.
There’s a cost to this and that cost is reflected in the trading fees.
There are no market makers. There are no dark pools of liquidity.
Overall, the trading fees are lower than they are on Bitfinix and other exchanges, but the fee is broken up between placing the order and executing it.
Spreads on OpenLedger are wide for a lot of currency pairs because many of the pairs traded are incredibly thin. But, at least I know that if I’m going to play around trading Steem or bitRubles then I know the person on the other side of the trade is committed to their bid or ask.
And that’s where the limit to spoofing lies, in creating an exchange more immune to it with a transaction history anyone can monitor and/or audit at any time because it’s all on the blockchain.
Fraud thrives in secrecy and dies in the open. The promise of the blockchain is its potential to discourage and/or eliminate fraud.
What’s next is finding out what the people really want? The juicy steak of fake liquidity and fraud or the reality of price discovery without it?