Cryptocurrency Prices On Exchanges Being Manipulated By Trading Bots

Price manipulation has been a huge concern in the cryptocurrency market that has affected both the growth of cryptocurrencies and their regulatory acceptance. A report by New York State Attorney General Barbara D. Underwood, published in September, warned traders about the potential for cryptocurrency prices to be manipulated.

Underwood said bots were a source of price manipulation and that cryptocurrency traders could either create bots themselves or purchase them over the internet, in order to manipulate prices. The report said there was no mechanism for finding out suspicious trading strategies that multiple platforms employ. While few platforms restrict or even monitor the operation of "bots," there were certain trading platforms that "deny any responsibility for stopping traders from artificially affecting prices."

Bots are software applications — in this case, automated trading programs — that let traders set specific rules for buying and selling, submitting orders to a market center or exchange, and then automatically executing the trade as well.

The Wall Street Journal Tuesday

“This sort of activity is rampant in the market right now,” Andy Bromberg, cofounder and president of CoinList, a startup platform for issuing new digital tokens, told The Wall Street Journal (WSJ) on Tuesday.

Virgil Capital, an $80 million cryptocurrency hedge fund, uses its own bots to overthrow competitor bots and uses them on dozens of cryptocurrency exchanges worldwide. Stefan Qin, the managing director at Virgil Capital, told WSJ his company built "error handling functions to check for hostile and potentially illegal activities [from competitor bots], such as the Wild West of crypto.”

He also revealed that earlier in 2018, Virgil Capital lost money on ether — ethereum cryptocurrency token — trades due to bot activity.

Qin explained how these bots tricked the company into posting orders for ether. Virgil's trading platform would check prices every minute for a good opportunity to make a buy or sell order, and at the same time, the hostile bot would "post and order to sell ether at a price lower than what other sellers were offering," prompting the platform to buy ether. As a result of this manipulation by the bot, Virgil posted buy orders that never got executed, because the bot would cancel its sell order before Virgil's purchase transaction could be completed, resulting in increasing ether prices on the exchanges. Qin said the company ultimately had to change the algorithms on the platform, so it wouldn’t continue to be manipulated by bots.

Some people in the cryptocurrency space opposed to cryptocurrency regulations do not consider market manipulation as something wrong and openly support it.

Kjetil Eilertsen, who started trading bitcoin in 2011, created a program called Quatloo Trader that he promoted as “the best market-manipulation tool in the world of crypto.” Eilertsen said it was useless to ban manipulation in digital currencies, and instead, a better approach would be to give sophisticated manipulation tools to small traders.

The purpose of the program was to make market manipulation simpler by using built-in tools like a special tab called “whale tools,” which executed several “abusive strategies.” “If everybody can manipulate, then nobody is manipulating,” Eilertsen said, Bloomberg reported. “You can’t ban anything from people who are dedicated to doing something.”

This method of faking orders and cancelling them is similar to spoofing, a tactic intended to trick ther investors to buy or sell an asset by falsely showing greater supply or demand than there actually is. The United States futures and stock markets banned the practice in 2010.