One of the biggest concerns of the US Securities and Exchange Commission is the possibility of price manipulation within the crypto niche. But just how true is this? Though Hester Peirce decided to defend the idea of having a crypto-related ETF, it is undeniable that the agency makes perfect sense. There is really a chance that some parties are benefitting from manipulating the market.
According to the report entitled “Virtual Markets Integrity Initiative Report” that was published by the office of the New York State Attorney General, there is a strong possibility that cryptocurrency exchanges are manipulating the price of cryptocurrencies.
The New York State Attorney General submitted a letter to 13 crypto exchanges probing their policies and internal operations. Exchanges such as Kraken refused to comply to this probe.
One of the most common practices by exchanges today is having proprietary trading. Here, exchange employees are filling in the buy and sell orders on behalf of the company. Here, a crypto exchange is directly going up against its customers. And this isn’t surprising. A crypto exchange trading desk might actually be seeking to maximize profits for the company. Here, an exchange that makes use of pro traders can go against traders with less experience.
In addition to this, proprietary trading can increase the liquidity on the platform. This is especially true for markets that are thinly-traded. Trading desk place both buy and sell orders and therefore makes it easier for the customers to execute these trades. What it basically does is build a new customer base in an organic manner.
Proprietary Trading is Quite Rampant
Different crypto exchanges do this strategy. According to the report, Coinbase engages the most in proprietary trading. It accounts for a total of 20% of the entire platform’s trading volume. BitFlyer USA, on the other hand, has its proprietary trades at 10%.
Crypto exchanges mentioned that their traders do not have any type of advantage over their customers. The report mentioned that “Trading platforms that engage in proprietary trading on their own venues uniformly told the OAG that their trading desks had no informational or other trading advantage over customers”.
According to the OAG report, this raises “serious questions” especially when it comes to the hidden risks that customers have to deal with. The report mentioned that: “Such high levels of proprietary trading raise serious questions about the risks customers face on those platforms. As a general principle, when a significant percentage of the volume in one or more assets on a venue is attributable to one source, customers face the risk that the availability of liquidity in those assets could change, without notice and at any time, including when liquidity is needed most – namely, in times of market volatility or rapid price movement”.
It is true that the crypto market is prone to manipulation. This report highlights the importance of having the right regulations to address the situation. In fact, Japan is among the countries that already imposed rules that will help protect crypto investors by imposing stricter rules on crypto exchanges.