CFTC Orders Coinbase Inc. To Pay $6.5M Penalty
cftc.gov
cftc.gov
If I’m reading this right, the employee had a program interfering with GDAX generating dummy orders filled by itself. To other customers, would look like real liquidity on the platform but it was astroturfing.
Was this “fake it till you make it” or something more manipulative? Or perhaps just a lone employee trying to pump Litecoin for their own profit?
Cryptocurrency is like the wild west of finance, but I expected at least Coinbase was playing fair. Apparently not.
What’s bad about that? (not concern trolling, just a noob)
If one person bought or sold a widget in the last week for $10, you might have a lot less certainty about the actual value of the widget.
The technical term is precedent transactions. Less technically, more observations of a thing increases confidence that the thing exists.
It does not guarantee that the thing will continue to exist. But then again, nothing does. (We “know” the sun will rise tomorrow because it rose yesterday and the day before that.)
With nihilism out of the way, how is million people independently trading a thing for $10 once meaningfully different than a single buyer/seller pair trading a thing for $10 a million times?
A price of an item isn't a random phenomenon - it's just a reflection of what buyer and seller believe other people would pay for that item. This belief is based mostly on knowledge of what other people actually paid for it (or a similar widget) in the past. This process is mostly convergent[1]. Prices change at the rate of information flow, and tend toward some equilibrium. The process may be quite unpredictable, but the expectations are bounded.
As a result, markets automatically price everything relative to everything else, in a way that mostly makes sense. This is a very useful property - it's a bottom-up, implicit, somewhat fair way of solving resource allocation problem in society.
Generating fake trades like this? It's injecting bad data into the market. It's poisoning the mechanism of price determination - which, to produce reasonably fair determinations, needs aggregate trades to average great many distinct buyer/seller negotiations. Amplifying a single datum with fake trades ultimately makes the market worse at efficient resource allocation, and thus less useful to society. It's pissing in the pool from which everyone drinks.
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[0] - https://en.wikipedia.org/wiki/Problem_of_induction.
[1] - Or perhaps "consilient", which is a nice word I just discovered - https://en.wikipedia.org/wiki/Consilience.
It's even more helpful than that. It shows that a million people valued widgets at $10 or more, and a million others valued them at $10 or less. So if you value it at $10, you won't be too wrong.
With some assumptions about liquidity and the depth of pocket of market makers, you can draw some further conclusions like "not many people could have valued it at $12 or more".
> Generating fake trades like this? It's injecting bad data into the market. It's poisoning the mechanism of price determination - which, to produce reasonably fair determinations, needs aggregate trades to average great many distinct buyer/seller negotiations. Amplifying a single datum with fake trades ultimately makes the market worse at efficient resource allocation...
I'm not a legal or markets scholar, so please excuse this possibly dumb question.
Why are wash trades specifically harmful, as opposed to book orders that don't self-trade?
Like, I think what Coinbase did not get in trouble for here was having a large order book that they did not intend to trade (spoofing), but they instead got in trouble for trading with themselves at prices they would have traded with any other market participant. (Seemingly, as a fluke of the way they structured their market-making apparatus as two separate bots, instead of a single bot.) Since this was on a public market, the trades inherently happened somewhere between the public bid and ask prices -- right? I don't understand how the self-trades manipulate the price information. The fakeness that comes out of this seems to be purely the metric of trading volume.
If I'm wrong, please let me know! I'd love to learn more. Thanks.
2- It could trick customers into executing larger trades than what the liquidity is capable of handling without price impact, but this is a more minor point to the above.
Is this sarcasm?
Without trying to defend Coinbase in particular, isn't the fact that this was caught and punished evidence of the system working as intended? Like, what you would not want to see is a "regulated" market where the regulators never find anything bad going on.
I didn’t say anything about other regulated contexts? The regulations and enforcement agency exists because this was happening long before cryptocurrency.
Cryptocurrency is just uniquely positioned to support techniques like wash trading because it’s much easier to create multiple wallets and transfer funds around in ways that obscure the origin.
“Everyone else is doing it” isn’t an excuse.
Debatable, as most criminal activity in our society carries with it something more deterring than simply a fine. Having to write a check is what happens when you get sued and lose (a civil issue).
I think you're misinterpreting what you are reading.
This is not coinbase doing anything, this is an employee taking action on their own, likely not even on company time or on company property.
That said, the company is still responsible for the employees' actions, especially because it relates directly to their job.
Per the article: "Coinbase recklessly delivered false, misleading, or inaccurate reports concerning transactions in digital assets"
Brokers do this all the time. It's not really something unusual as you might think.
I thought the whole point of crypto was anarchy and decentralization? Maybe it's time for Reddit to hype up some coin so that the fines can be covered?
The behaviour described otherwise is clearly intentional, so Coinbase’s PR seems to be trying to whitewash their history.
It makes me believe my hypothesis that Coinbase deliberately (through purposeful neglect or action) allows or causes the platform to become inaccessible to users when Bitcoin price starts to skyrocket - to block and prevent impulse "HODLers" from selling, allowing enough time for the impulse of many to quell, among other consequences; I'd be curious if Coinbase collects login attempt data during this time, failed logins, or if their whole website including login system is also down.
I really hope they survive. I don't know what's the future for crypto if we can no longer send or receive actual coins anymore.
It becomes meaningless to just buy and sell without ever being able to "own" the coins.
Buying and selling 'assets' on the Darkweb and amongst people you know in other countries with restricted foreign money transfer is one main use case of CoinBase.
In fact, I doubt BTC would have thrived as much as it did if it wasn't for SilkRoad/DarkMarket/EmpireMarket/WhiteHouseMarket etc. Not to mention the hundreds of millions that went into worse endeavors like ransomeware and funding terror organizations.
BTC didn't become what it is without the billions of dollars in demand for those very real use cases. Each drug dealer exchanges tens and hundreds of thousands of USD in crypt, much more than the average regular crypto enthusiast. BTC investors are investing in blood money, like it or not. It's not just a magic computer token thingy, and it hasn't been for a decade now since the SilkRoad inception.
You just described how to buy bitcoin privately with electricity. Why is it unrealistic?
Even if its possible, it would take days or weeks to get that much BTC. What if you want 2,000$ of BTC right now? Would you want to wait months before you get it?
And electricity cost varies widely between regions. Many areas in the US and China outright ban crypto mining.
https://bitcointalk.org/index.php?topic=347208.0
https://www.politico.com/magazine/story/2018/03/09/bitcoin-m...
https://www.wired.com/story/china-says-bitcoin-wasteful-want...
If you want to buy large amounts, you would use the P2P markets for fiat to bitcoin trades https://bisq.network/
Bisq sounds interesting, but I have my doubts about them, since there is no escrow system and I don't think there is enough liquidity either. I'll check it out anyway.
I was a click away from buying a rig rig a few years ago. I wanted to build the rig because that seemed like the fun part. I even had excess electricity from solar panels, but chickened out.
I thought bitcoin made sense, but listened to the masses? I was always one of those guys whom never took chances with money.
I just might buy a cheap rig tomorrow? I’m so lazy, and broke, I’ll wake up, and put it off?
The thing about fungible assets is that they are neutral money. They aren’t “blood money”, they are simply blind to whatever they are used for. At least they aren’t finding wars like the dollar.
Plenty of the drug trade BTCs goes to funding the cartels in Columbia and Mexico actually.
Source: Tried buying BTC on LocalBitcoins once and 9/10 of the US sellers were asking to send Western Union to Columbia. Meanwhile, we know from the government that a lot of the BTC payments on dark markets end up in the drug dealer hands in Columbia. So, apparently they sell the drug BTC back to us at the higher exchange rate for USD so we can give it back to them for drugs, back and forth....
Which are only economically viable due to the US "war on drugs" and draconian prohibitions, which we've managed to export across the world via our foreign policy. Which brings us full circle back to the US dollar funding wars.
It's as though unethical people exist who are willing to do bad things with whatever they have to hand if it turns a profit.
However, just for clarification, BTC has been in the news very often during the last year. And many people are investing heavily in BTC since then. People who would otherwise never hear of BTC before.
Coinbase is only needed to get fiat in/out.
GameStop won't keep increasing for ten years, like crypto did, without some real world fundamentals.
Even in GME case, you have the short sellers as a backbone for its rise, not just buying and selling for the sake of it. Without the short sellers, GME wouldn't have risen up that much.
Any decent one is using Monero, which isn't necessarily the target of a ton of speculation, I think.
Owning a cryptocurrency means nothing if you can't actually use it as a currency in real world.
Disclosure: my sell orders are always higher than the current market rate
And they're way cheaper than Coinbase.
You should prefix this with "in America". In Asia excluding China the industry's quite healthy, with a bunch of exchanges available. The "future of crypto" in America will just be to use a good VPN.
https://starkware.co/ https://optimism.io/ https://www.immutable.com/
Fake volume which creates demand from the public. It’s what all (early) stakeholders want. Crypto trading in general is such a scam, with the exception of a few of the top ones.
It is cheating the numbers, but it could be moderately beneficial or terrible. If it's actually entered onto the books as liquidity for some time before being consumed, then I guess it could help eliminate slippage, although I think more likely it is matched in the way that puts the desired slippage into customer trades only.
> with the exception of a few of the top ones
like Coinbase?
At a paltry 6.5m, the message it sends is “you got away with it.”
Considering the description of how this happened (two independent trading bots that sometimes matched one another) it sounds more like a lack of controls rather than any malicious intention to deceive markets. And, at least for now, intent matters in our legal system.
1. What you said. Two bots that lacked controls and interacted with eachother. which may have been accidental
2. A rogue employee intentionally using those bots to fake volume on a specific currency pair. This is actually malicious.
Running multiple algorithms is as common as writing multiple unit tests. That is standard operating practice.
What is also a common practice is adding a netting layer so that your algorithms internally settle before sending out trades to the market. This is generally done to save trading fees, but it didn't apply to Coinbase because they are also the exchange.
So, overall it sounds like inexperience, not malice.
What about percentage-based fines? I.e. 1% of market cap.
You can try to pay a fine by selling more stock. Or by getting convertible bonds. But there are no guarantees.
The other point of view is that by speeding, you are doing a certain amount of damage to society. Speeding does kill people, so you can spread the cost to society across all speeders. Government agencies regularly put values on human lives (usually around $10 million right now), so it becomes a simple number of people killed * $10 million / number of speeders / rate of speeders being caught. This damage being done, however, is the same no matter how much money you make.
There's a long tradition of seeing the punishment for a crime as making society whole after you've done damage to it (hence the phrase "paying your debt to society" being used to refer to a prison sentence).
It isn’t. Why should I pay the same fines while driving my lamborghini with fresh brakes and tires as the poor people speeding in their deathboxes? My car probably has half the braking distance of theirs.
Besides, others on the road don't care about how good your brakes are. They just care about what to expect and someone speeding by is not what they expect. And its not like the brakes are gonna help you much if you make a mistake. If anything the extra feeling of safety is gonna make you drive more riskily.
GameStop should not receive a fine 10 times it's revenue just because some random people pushed its price up 100x.
Seems a bit unfair on coinbase when pretty much everyone else is doing this stuff deliberately, whereas they are being punished for a seemingly accidental case of the same.
In addition, the order finds that while Hedger and Replicator had independent purposes, in practice the programs matched orders with one another in certain trading pairs, resulting in trades between accounts owned by Coinbase."
Doesn't sound very accidental.
> The order also finds that over a six-week period—August through September 2016—a former Coinbase employee used a manipulative or deceptive device by intentionally placing buy and sell orders in the Litecoin/Bitcoin trading pair on GDAX that matched each other as wash trades. This created the misleading appearance of liquidity and trading interest in Litecoin.
We always knew that wash trading activity was rampant in the cryptocurrency space, but I didn't actually expect Coinbase employees to be doing it within Coinbase. If employees of the most regulated exchange in the world were wash trading with some regularity, makes you wonder how bad it must be at some of the more Wild West exchanges.
And I literally worked on a Dark Pool Crossing Engine myself at the the time, and here's my take:
Having multiple algorithms running at the same time was...unremarkable. And since they're all running different algorithms and all trying to game the market, it wouldn't surprise me if they ended up trading with each other by accident, especially if they had multiple accounts to trade with. What's honestly more surprising is that they only had two running at once. And further, if they both traded through a dark pool, then there's no way they could know they were trading with each other, because that's one of the intended features of a dark pool.
So accidental seem plausible, but then again so does malice.
Now if it wasn't through a dark pool, and the algos could see each other's accounts, then naughty naughty, and they deserved every cent of the fine.
Having two separate algos directly and actively trading in the wild is highly unusual.
There are obvious reasons for which you don't want your algos to trade one against the other on the market.
First, it's very dangerous as you can end up in the situation described here where you essentially self make the market.
But more directly for simple execution costs/fees reasons.
I don't know of any single player that has concurrent algos where there is not a "netting" layer between algos and the market, so that concurrent trades are matched internally before reaching the market.
No it's not. ATD had like 50.
>There are obvious reasons for which you don't want your algos to trade one against the other on the market.
Who said they're trading against each other? Just look at GME. Swapping shares back and forth makes trading volume go up.
Every imbalance is gameable, and they have armies of people whose job is to find every gameable imbalance and make money off of it.
>First, it's very dangerous as you can end up in the situation described here where you essentially self make the market.
As we've seen when traders have bankrupted themselves.
>I don't know of any single player that has concurrent algos where there is not a "netting" layer between algos and the market, so that concurrent trades are matched internally before reaching the market.
Well I know of one that had 15+, and coinbase just got busted with two so...
They're not evil, just another tool.
I don't (and won't) work for them again, but there were non-evil reasons for a dark pool.
Anonymous trading (dark pools) also prevents favoritism and collusion too. You're trading based on nothing but the price and public information about the company. So it's less gameable.
"Everyone else is doing it" was never a valid excuse.
This statement suggests that at least one Coinbase employee was acting very deliberately. No accidents here. Why would an exchange need to trade from multiple accounts with multiple uncoordinated bots in the first place?
Nah, the opposite. It’s a small financial slap on the wrist, and in exchange they get to be absolved of their past sins and be declared squeaky clean. New competitors will need to be perfect from the get-go.
Coinbase is playing by the rules, that's why they are not shut down but got a small fine.
All other exchanges will probably shut down and their operators might even get jail time.
Oct 2011: Charlie Lee created Litecoin
Jul 2013: Charlie Lee went to work for Coinbase
Aug 2016: GDAX (now known as Coinbase Pro) added support for Litecoin
Aug-Sep 2016: An unnamed Coinbase employee manipulated Litecoin trading volume on GDAX
May 2017: Coinbase retail added support for Litecoin, which doubled in price immediately
Jun 2017: Charlie Lee left Coinbase (presumably having accomplished his goal of getting Litecoin listed)
Dec 2017: Charlie Lee sold all his Litecoin near the all-time high
Haven't seen evidence of the big ones doing it - Bitmex, Binance, etc. FTX has good analysis on this.
Queue a single lot in the queue and observe that your fill is exactly when you expect. If they were generating fake trades it would be obvious since there would be trades that don't lead to you getting filled when you should be getting filled.
If instead they were actually wash trading on the real market (not just generating fake trades, which is the most common approach), that would be much harder to detect with any kind of forensic analysis of the data, you'd need some whistle-blower. However, doing this would be impossible in a liquid asset like BTCUSD or LTCUSD.