Crypto Might Have an Insider Trading Problem
wsj.com
wsj.com
The anonymous person has told me this is not even a real secret, it’s an open secret in DeFi and that for some reason all the other “investors” do either not care or just accept it and that it happens with every single “project”
Your can mention regulation until you're blue in the face but it won't matter because for many crypto is the antedote to a conspiracy theory they've been literally sold.
And the worst part is: as with all conspiracy theories, there's a grain of truth in there--fraud and insider trading absolutely does happen in tradfi!--which makes it that much harder to convince these folks they're wrong.
I wouldn't paint all of crypto with that brush, but certainly a large proportion.
I would.
I'm sorry but its been almost fourteen years and not a single mainstream product has come out of this so-called revolutionary technology. Zero.
For the entirety of the last 10 years I've been hearing how blockchain is the "internet of the early 90s" - well by now it should be the internet of the early 2000s, but it's still the "internet of the early 90s" according to proponents.
It's time to stop and ask yourself: what if it's just not that revolutionary after all? What if a really slow database isn't a solution to all our problems?
Most confidence tricks involve this. I actually find the rare tricks which rely on the mark's honesty to be more interesting because you need a strategy more complicated than just "Don't be dishonest" to avoid losing.
I'm not sure who holds that assumption. The clear, explicit assumption is that regular market does not have insider trading, and the SEC is watching like a hawk to make sure this stays that way.
You can always believe in some alternate conspiracy theory that the markets are rigged, but I assure you, you are in a minority. The vast majority of the people (including yours truly) assume that the SEC is doing a fairly good job. Could there be exceptions? Of course. Is insider trading the rule? Absolutely not.
Obviously they're looking to sell them for more than they got them, but more often than not, the general public doesn't care enough to buy them at higher than the pre-sale price. There's significant risk involved when participating in pre-sales. It's not like it's just a free money free for all. Those are the ones you don't hear about because no one is in the office bragging about how much money they just lost.
Every DeFi exchange I know of allows anyone to list any token at any time. That's part of what makes them "decentralized", so the concept of knowing ahead of time when a token is going to be listed doesn't make any sense in the DeFi context.
Pre-Sales are often conducted via a DeFi style ICO, which might list tokens at a certain price governed by some fancy mechanics (getting cheaper, or more expensive, over an n-week ICO window or something, dutch auctions, etc), and then eventually the tokens go up for sale on centralized exchanges, which is the "insider" event being discussed by the article, and presumably, the person I replied to.
That said, yes, the headline eyeroll is warranted.
What is being described here is not front-running.
Hilariously, Dfinity is now suing Meta for its new logo (which looks like an infinity sign too). Obviously a silly lawsuit, but now googling "dfinity sued" is all about Meta and not about their being sued. Scuzzy.
A "red bus cheese party"?
I can also attest to this happening.
The fact that the WSJ thinks a trivial amount of insider trading is note worthy indicates that they don't have the first clue how crypto works. Go and read up on the regulations around trading regulated securities, and then realise that that's an instruction manual for how to make money trading bitcoin.
Arthur Hayes was just sentenced. This is old news. Exchanges trade against their customers as a matter of business. It is core to their revenue.
What's the financial incentive for a company to actually enforce "insider trading" rules to its employees? In fact, what does "insider trading" even mean in this context? Shouldn't that be defined by a central authority?
When I read the title, it was, "No shit? What do you expect in an unregulated market by design?"
I realize that "lots of insider trading is obviously happening, naturally" is a big statement and unfalsifiabe, so going in the other direction is more logically sound.
On other hand, I can't help but feel it doesn't need to be proven. Unregulated economics is in the design! Maybe we just need more articles like this to prove the trend, but do we still feel the need to prove it? It reminds me of the way scientific consensus fought and eventually converged on "smoking causes lung cancer", even though that wasn't agreed upon at the beginning because monied interests disagreed. But it was like... well, you're burning toxic chemicals inside your lungs, it's in the design isn't it?!
Which take makes more sense currently?
Compared to the other kinds of fraud endemic to cryptocurrency, the risk of a corrupt market is a slow burn. Probably the Ponzi scheme will collapse or the rug will be pulled or the contract will be hacked long before the sheep realize they are being fleeced by insiders.
But if your exposure is more from following tradition financi news, you may have seen some of the disasters and certainly volatility but otherwise may seem like a gradually emerging but not quite mature new asset class.
If this audience doesn't understand what they're investing in and the rules around it, they're not very good investors, are they?
E.g. for Coinbase/Binance the financial incentive is that users might invest less in their offerings if they consistently do worse when participating there compared to initial offerings elsewhere or simply due to seeing proof of it. Similar/related rules might disincentivize insider trading for the projects themselves if insider trading is harmful in the first place which I am not sure of. If it is, and the common arguments that it leads to less outside investments are true then that should at least partially incentivize long-term thinking projects against it. Further, Coinbase/Binance have the incentive to dissuade projects from taking advantage of the information and as far as I know indeed try to though I guess their success is mixed.
Aside from bad PR spreading like wildfire, won't market participants noticing their poorer performance present as a negligible quantity and be written off as bad luck because the volume accounted for by company employees is too small to make a dent? If I understand correctly, for a long time, Redditors in WallStreetBets said they were too small to make a dent in stocks, but it was only because of the run-off effect of being a public forum that GME exploded and garnered attention. I figure that a company with employees that can do things quietly and in an unmonitored, unregulated fashion wouldn't run into people noticing it unless they got stupid and grew it out of proportion.
tangential "Fun fact":
The origin of the phrase "correlation does not imply correlation" comes from Ronald Fisher, the father of frequentist statistics, defending tobacco companies. It's unknown by many people but Fisher was an aggressive shill for tobacco in his day and argued that the strong correlation between smoking and lung cancer was not adequate statistical evidence to show any relationship. Fisher, to this day, being one of the most respected minds in statistics held a lot of weight with his opinions and is very likely a major reason why it took decades for legislation to make any progresses in this area.
As a stats person it's one reason I really hate that phrase. Of course there are events that have correlation without causation, however the XKCD hidden text [0] is a much more accurate phrasing:
> "Correlation doesn't imply causation, but it does waggle its eyebrows suggestively and gesture furtively while mouthing 'look over there'."
An industry where lots of people get to learn why 100+ years of financial regulations exist..
They're speedrunning centuries worth of financial scams.
(a) what does this have to do with monetary policy? the bailouts were run by Treasury and were strictly fiscal policy. this isn't really something we learned about money.
(b) bailouts were loans not grants, and not only has the entire balance of the loans been repaid, the government netted a tidy profit ($109B) - and there's more left. [1]
The fiscal bailouts became necessary because the Fed had fired all of its monetary policy bullets and it had failed to arrest the collapse in confidence which was freezing credit markets.
Like I said, the jury is still out. Maybe the next time will go just like 2008. Maybe there really will never be any price to pay for all this moral hazard that's being stuffed into the system.
> In total, the government has realized a $109B profit as of May 13, 202. (sic)
…how do such colossal, above the fold mistakes like this get made by big name publications. While I actually do believe you're correct here, I'm hard pressed to trust the data with that kind of lack of any sort of review.
I think the financial masters of the universe have found some way to screw us and it's just hiding in some accounting tricks.
It seemed pretty close to insider trading to me. While the network was getting back to its previous aggregate hash rate the difficulty would be exceptionally low, so everyone closely involved had a window of easy mining every time the algo changed. It would take days for the aggregate hash rate to recover 100%...
If you keep it that way for years, it starts looking very deliberate. In this scenario I'd describe the "insiders" as those participating in and following monero's development closely enough to be continuously aware of these changes at the source level. We're not talking about SEC regulated crap where insider trading is well defined, this is all unregulated wild west software land. Insiders are the nerds cloning git repos and building from source, lurking in monero chat rooms all day, etc.
This was years ago now, but at the time at least this wasn't an automated mechanism. So yes, you could follow the repository and pay very close attention, and if you're savvy enough maybe even automate that process to deploy the new miner whenever changes landed. (mine often broke by amdgpu opencl incompatibilities though, it often took some hacking to make the new algo work)
But from where I was sitting it was very clear that the manual nature of it created tons of opportunity for the developers and those savvy and close enough to practically be in the same privileged set as developers.
Whenever they changed the algorithm the network reset and the hash rate was a tiny fraction of its previous quiescent state, with a low difficulty, for days. I was paying semi close attention at the time, and even being purely manual with a single eGPU mining rig was able to somewhat capitalize on the opportunity created.
Practically all my pittance of shares were mined in post-reset low difficulty periods. Those with actual large mining farms normally competing with the full rate difficulty surely were quite productive in those windows.
There's no question that the switchovers would kill the hash rate, we can infer from that most the miners were being manually maintained by folks not closely monitoring the upstream repo for every change.
There's certainly a lot of insider trading (adjacent) bad behaviour in crypto generally, but the example you've given is the opposite.
The difference with Crypto is that because there's an actual record of transactions, there's at least a chance for the public to catch onto shady looking behavior that manipulates the price of an asset.
A lot of people falsely think the stock market is heavily regulated and pure. It's not. You can't even find out a definitive answer as to how many shares of a stock currently exist. Crypto is infinitely superior in many respects.
but can we do anything about it even if you catch the behavior? other than old-school regulation and litigation? and eventually add checks and balances
> You can't even find out a definitive answer as to how many shares of a stock currently exist
maybe there are better models of stock exchanges? (hopefully looking at Europe, or at least in the past)
Financial disclosures in stocks are typically required to be filed within 30 days. As we know in investing, timing is everything. The financial disclosures that exist IMO mainly serve to placate the masses that there's regulation and are worthless for knowing about actual problems or impending price movement.
With crypto, big movement of assets happens on a blockchain and can be observed in real-time. There's at least a chance of catching issues in a way that can't be replicated with stocks.
Insider trading isn't X sold stocks at Y.
Insider trading is X arranged to sell stocks at Y based off of information disclosed from internal actor Z that was not publically knowable at the time of initial communication.
It's about having a traceable privileged internal source that no one else did. Both the source and the trader are then culpable. Nothing about order stream makes it clear insider trading happened. It's about communications and things that happened before the trade that make insider trading.
Trading in ones own shares as an executive is often treated with extra care because you are the ultimate insider, and you are also burdened with a responsibility that should prevent you from shorting your own stock (shorting as an exec signals either regulation on the horizon, or somebody hasn't been doing their fiduciary due diligence).
What do you mean? I can google this for any public stock and I get answers; are you claiming they’re wrong?
Shares are "borrowed" for a fee and flood into the market. Voila, buyers now have to buy a bunch of new shares that shouldn't exist just to keep the price level. Unethical hedge funds have made a living essentially tanking companies by borrowing loads of stock, selling at a high price and flooding the market with far more shares than should exist, tanking the stock price making the company having far more problems raising money (and killing off some of them). The borrowed shares are returned when the price tanks at a much cheaper price. This is bad for the world when it's just some weaker retail outlet being dumped, but devastating if it's some biotech firm researching medical cures being hamstrung.
Now, there's supposedly some regulations and disclosures for this like the Short Interest stat that are usually published I think twice a month. But this is time delayed and manipulatable.
Here's an interesting anecdote about this in an OTC market: https://www.reddit.com/r/Superstonk/comments/rsaevv/in_march...
> In March of 2005 this guy bought 100% of shares (1.1M shares) in a traded company to prove the corruption. The next two days that same stock traded 50 million times and dropping the price 99% in two hours. All this with LITERALLY NO SHARES AVAILABLE TO BORROW OR SHORT.
It feels like you have just changed the question from your original claim that "You can't even find out a definitive answer as to how many shares of a stock currently exist" - when the answer is easy, go to any website and divide market cap by share price.
Want to find out what is shorted? Go on any website that has a stock quotes service or find the short interest ratio, which is declared at least twice a month for American assets. On the other hand, how would you see how many short positions exist for BTC considering that it is traded across multiple exchanges?
Short selling never creates new legal shares with voting rights: but they do exist in the marketplace until that position is closed. This means that this artificial share affects the price per share, does it not?
> the answer is easy, go to any website and divide market cap by share price.
This is a chicken and egg calculation. How is market cap computed? Market cap is computed by taking shares x price per share.
But if you have an unknown number of borrowed shares in the market, then this entire calculation is unreliable. The only reliable number that exists in stock trading is the current price per share.
> declared at least twice a month for American assets.
It seems like you see twice a month as a good thing. I think it's a bad number that can be easily manipulated.
> On the other hand, how would you see how many short positions exist for BTC considering that it is traded across multiple exchanges?
Absolutely perfect information about all of reality would probably never exist, but you have a blockchain you can look at in real time, you have exchanges that publish wallet addresses and other information that can be monitored to see reserves, inflows, and outflows. IMO, there's a bit of some kinds of disclosure possible with crypto that cannot exist with stocks.
You have perfect knowledge of the number of actual issued shares, plus a 2 weekly disclosure on the number of borrowed shares.
> Absolutely perfect information about all of reality would probably never exist, but you have a blockchain you can look at in real time
How does the BTC blockchain, as an example, show short positions? (Hint: it doesn't, it requires disclosure by centralised exchanges in exactly the same way, except these disclosures are entirely unregulated and spread across many exchanges).
Sounds like this is a criticism of stock exchanges that is again worse in the cryptocurrency/blockchain magic world.
How does selling a ton of shares into the market move the price down, but buying an equal number of shares back to complete your short doesn't move it back up?
Is this not a double-edged sword? If you dump enough shares that you actually affect the market price, you'll have to do the same thing on the way back.
1) In an ideal world, the tactic tanks the price enough that investors don't support the company, they have trouble raising capital, and go out of business and the borrowed share (I believe) either never has to be repaid or is trivial to recover.
2) When you're dealing with really big money and want to enter or exit a position without affecting the price too much, you don't just go to your stock broker and enter a buy or sell order for however many shares you're dealing with. You use experienced people and automated algorithms to time the deals to have as minimum an impact on the price as possible and enter/exit smartly.
3) Dark pools exist for making orders that don't impact the public price. https://www.investopedia.com/terms/d/dark-pool.asp
Couldn't I use this to make easy profits on longs?
Say "X" is the method to place orders that don't affect the price.
1. Buy 5 million shares via X, at the current low price
2. Buy 5 million more shares via my stock broker, pumping the public price
3. Sell all 10 million shares via X, all at the new high price
My guess would be that the organizations you deal with through these dark pools or whatever discount your trades based on the perceived advantage you're getting by not making them public. If the public price is $100, and you want to sell a jillion shares through a dark pool, nobody is going to offer you better than, say, $98 per share or whatever their quants have calculated as a fair price for a sell that big. Likewise if you wanted to buy a jillion they'd ask for $102 or so.
There can't be a free lunch here.
Unless you're talking 'naked shorting'. Which is illegal. Though I'm not sure to whose overall benefit.
https://www.investopedia.com/terms/n/nakedshorting.asp
I make no judgement on it's relative virtue.
From an information theoretic point of view, if you audit the holdership of all outstanding isuued shares you will see more orders of involved shares than there are actual sellers that can complete the transaction. These other orders are tracked as FTD's, but may constitute a negative sentiment signal to other actors in the market.
Realistically speaking though, it's basically a Stock Market version of a smear/negative advertisement/marketing campaign. Someone burned money to create the appearance of a lack of confidence in a security. The fact it's illegal is arguably a free speech violation.
Whether you act on the naked shorting's distortive info is entirely up to you.
There are numerous example from IPO bonanza that took place last year where investor did exactly the same and now their stock have reached rock bottom. Whatever value those companies had, the 'insider investor' had their pay day, now its left to rot in public domain. Fantastic.
They are very open about insider trading
I'm still trying to decide if the narrow & broad crypto term is rather than has the problem.
That’s like saying Jeffery Dahmer may have had a dietary selection problem.
Crypto is also very much a mess in this regard, but you have a much greater shot at fairness, given that to some extent, blockchains must be visible and open.
>KESTENBAUM: And she says while everybody gets upset at insider trading because it gives someone an unfair advantage, that is not the legal reason why it gets you into trouble. The argument used these days in court for why it's illegal is that insider trading amounts to stealing information from a company. It's like theft.
>GOLDSTEIN: And so for that reason, proving that someone traded on insider information - that is not enough to convict them. If, say, a financial document from some company blows out the window and you happen to find it sitting there on the sidewalk, Sarah says it's not insider trading for you to use that to make money in the stock market because you didn't steal it.
https://www.npr.org/transcripts/596532106
In the case of public corporations, insider information (eg. this quarter's earnings) belongs to the company and the company has a duty to act in the interests of its shareholders. If you work at that company and trade on that information, that's illegal because the information doesn't belong to you. However, in other markets (eg. commodities or forex), no such "owner" of information exists so "insider trading" is effectively legal[1]. Applying this to the example, it's unclear whether it would count as insider trading. I suppose you could argue that people working on the project has a duty to protect tokenholders, and therefore they should be barred from trading ahead of some announcement, but in this case the insiders seem to be insiders on exchanges, which hold no such obligations.
[1] "Insider trading" in energy markets is not really a thing, because energy markets are largely for producers and users of energy to hedge their production and needs, and that production and those needs are the sort of "inside information" that would move markets. So everyone just kind of gets a free pass to trade on inside information. https://www.bloomberg.com/opinion/articles/2013-12-19/helico...
Capt. Renault - "I am shocked, shocked to find that gambling is going on in here!"
(Croupier hands him a neat pile of money.) "Your winnings, Sir"
Renault - "Oh, thank you very much!"