4 ms·

> deliberately generating the appearance of liquidity and demand by placing wash trades What’s bad about that? (not concern trolling, just a noob)

TylerE 6y ago
Without liquidity, an asset is worthless. If it's quoted as being worth $100, but there are no actual buyers, it isn't actually worth $100.
- loeg 6y ago
  You could spoof a large order book without ever wash-trading with yourself (this is not legal advice). The specific regulation is around self-trades. If there is a lot of orders around $99.98 and $100.02 you can be pretty confident something is worth about $100 even if it never trades.
  - deleted 6y ago
    [deleted]
matheusmoreira 6y ago
It makes people think the asset is more valuable than it really is.
ncallaway 6y ago
If millions of people bought and sold a widget in the last week for ~$10, you can be pretty confident that the widget is (currently) worth around $10. 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.
- petewailes 6y ago
  Strangely this isn't in fact true. It feels like it should be, but just because something has been consistent historically is not evidence that that's going to continue into the future.
  - Closi 6y ago
    It is evidence, clearly, it’s just not a guarantee.
  - ncallaway 6y ago
    I feel like it's 100% accurate to say 1,000,000 transactions within the last week gives you more confidence than 1 transaction within the last week as to the current market price.
  - JumpCrisscross 6y ago
    > just because something has been consistent historically is not evidence that that's going to continue into the future 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.)
  - lordnacho 6y ago
    It's not a statement about the future, it's about the present. You should indeed be more confident that 10 is the right price right now if you see a load of people near you in time and space trading at 10.
  - TeMPOraL 6y ago
    That's not relevant, though - except in the most trivial way of the problem of induction[0]. Technically, we can't be sure the sun will rise tomorrow, or that gravity will still work the same way 5 minutes from now. Neither can we be sure the market will not collapse next week. But this way lies madness - reasoning about the future is impossible. Fortunately, experience consistently demonstrates that if we have a good model of something, reality tends to stick to it, so we can use it to predict things. 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. -- [0] - https://en.wikipedia.org/wiki/Problem_of_induction 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 https://en.wikipedia.org/wiki/Consilience.
- loeg 6y ago
  If two people bought and sold the same widget for $10 a million times, that would be neither a wash trade, nor much more informative than one person buying and selling a widget for $10, right? But the trading volume metric would look the same as if millions of people were buying and selling.
artursapek 6y ago
In addition to screwing with price discovery, it also inflates Coinbase Pro’s volumes and makes the exchange look like a better place to trade. Crypto exchanges are often ranked/judged by their volumes.
hntrader 6y ago
1- It makes an exchange appear more liquid than competitors, even though it isn't, which gives it an advantage. Customers are tricked into signing up to what they believe is a liquid exchange. It's false advertising. 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.
Paradigma11 6y ago
The liquidity is not there. You might be enticed to buy litecoin since you can be sure to be able sell it anytime without much slippage and then be surprised that there are no buyers.
- loeg 6y ago
  They weren't spoofing the order book, right? You would look not just at trade volume, but also the bid interest, when considering future liquidity, I think. And that information was all accurate, to my knowledge. (I might be totally wrong! Would love to learn more.)

TylerE 6y ago

Without liquidity, an asset is worthless. If it's quoted as being worth $100, but there are no actual buyers, it isn't actually worth $100.

loeg 6y ago
You could spoof a large order book without ever wash-trading with yourself (this is not legal advice). The specific regulation is around self-trades. If there is a lot of orders around $99.98 and $100.02 you can be pretty confident something is worth about $100 even if it never trades.
- deleted 6y ago
  [deleted]

matheusmoreira 6y ago

It makes people think the asset is more valuable than it really is.

ncallaway 6y ago

If millions of people bought and sold a widget in the last week for ~$10, you can be pretty confident that the widget is (currently) worth around $10. 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.

petewailes 6y ago
Strangely this isn't in fact true. It feels like it should be, but just because something has been consistent historically is not evidence that that's going to continue into the future.
- Closi 6y ago
  It is evidence, clearly, it’s just not a guarantee.
- ncallaway 6y ago
  I feel like it's 100% accurate to say 1,000,000 transactions within the last week gives you more confidence than 1 transaction within the last week as to the current market price.
- JumpCrisscross 6y ago
  > just because something has been consistent historically is not evidence that that's going to continue into the future 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.)
- lordnacho 6y ago
  It's not a statement about the future, it's about the present. You should indeed be more confident that 10 is the right price right now if you see a load of people near you in time and space trading at 10.
- TeMPOraL 6y ago
  That's not relevant, though - except in the most trivial way of the problem of induction[0]. Technically, we can't be sure the sun will rise tomorrow, or that gravity will still work the same way 5 minutes from now. Neither can we be sure the market will not collapse next week. But this way lies madness - reasoning about the future is impossible. Fortunately, experience consistently demonstrates that if we have a good model of something, reality tends to stick to it, so we can use it to predict things. 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. -- [0] - https://en.wikipedia.org/wiki/Problem_of_induction 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 https://en.wikipedia.org/wiki/Consilience.
loeg 6y ago
If two people bought and sold the same widget for $10 a million times, that would be neither a wash trade, nor much more informative than one person buying and selling a widget for $10, right? But the trading volume metric would look the same as if millions of people were buying and selling.

artursapek 6y ago

In addition to screwing with price discovery, it also inflates Coinbase Pro’s volumes and makes the exchange look like a better place to trade. Crypto exchanges are often ranked/judged by their volumes.

hntrader 6y ago

1- It makes an exchange appear more liquid than competitors, even though it isn't, which gives it an advantage. Customers are tricked into signing up to what they believe is a liquid exchange. It's false advertising. 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.

Paradigma11 6y ago

The liquidity is not there. You might be enticed to buy litecoin since you can be sure to be able sell it anytime without much slippage and then be surprised that there are no buyers.

loeg 6y ago
They weren't spoofing the order book, right? You would look not just at trade volume, but also the bid interest, when considering future liquidity, I think. And that information was all accurate, to my knowledge. (I might be totally wrong! Would love to learn more.)