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This paper jumps the gun. Detecting wash trading by examining distributions over rounded order prices is a strong and dubious claim for which they provide littl

This paper jumps the gun. Detecting wash trading by examining distributions over rounded order prices is a strong and dubious claim for which they provide little evidence. The author's equate wash trading to non-rounded, clustered prices which really just indicates automated trading. Now automated ("bot") trading is a technology needed for exchanges wash trading sure, but not exclusive evidence of it. Automated trading strategies (e.g., "grid trading") are really popular and there are many third party bot providers that integrate in multiple exchange APIs. Maybe the unregulated class of exchanges here just has more permissive APIs/automation than the regulated ones. Automated trading is still legitimate trading where a party puts their capital on the line. I agree that the lack of rounding and trade size clusters is a likely approximate indicator of non-human orders. The presence of automated orders does not automatically mean there is fraudulent wash trading by the exchange. The authors also do not cite previous research or evidence of their methodology working for traditional finance. It all makes for weak evidence of actual wash trading.

KarlKemp 5y ago
Their idea does show a pretty stark difference b/w "regulated" and "unregulated" exchanges, however, as would be expected if that activity is fraudulent in some way.
- krisrm 5y ago
  I'm no fan of crypto currencies (as my comment history will show), but does "different" imply "fraudulent" necessarily? or are there other factors at play? eg. easier APIs, more variance in crypto prices so that an automated trading strategy becomes potentially more lucrative?
MuffinFlavored 5y ago
> Automated trading strategies (e.g., "grid trading") are really popular Why? After buying and selling side fees, is it easy to make a profit in an automated way with crypto?
- bluGill 5y ago
  I don't know, but it seems to be. In general though, if there are easy profits to make it is because someone on the other side is willing to lose "a small amount of money" for a long time knowing that when things change they will make a ton of money fast, on the backs of all the people they lost to. For starters, if you can make money in automated trading, why would you not make all the possible money yourself instead of telling other people (or writing the software) and splitting the profit? This question is one I ask anytime someone mentions easy trading, and because I've never heard a good answer I stay away. To do better than average is possible, but it requires a lot of deep study.
  - tommek4077 5y ago
    Because the retail market is big. If you personally buy or sell, you don't care for the "perfect" price.
  - pontifier 5y ago
    I wrote a trading bot, it worked well for a while and made money until Mt Gox shut down. I open sourced it because I thought it might be interesting for others to see. I updated it for Bittrex, but didn't have enough capital to actually make it work. Now everything has gone up so much, and I'm bearish on crypto in general, so I don't want to have any money invested in it. That's why mine is available, and I'm not currently trying to keep it running.
- mgaunard 5y ago
  First, most good trading, crypto or not, is systematic, which is automated. Then, from what people have told me, crypto is a highly inefficient market so huge of potential for market-making strategies. Tons of arbitrage opportunities between the various venues, centralized and decentralized, mostly uninformed non-professionals so non-toxic flow, huge spreads, etc. It's like the traditional tradi'g world but 30 years in the past. "Grid trading" is apparently just a weird term for placing orders proactively on multiple levels to obtain a better queue position, useful for increasing edge capture on exchanges with price-time matching. There are a lot more sophisticated techniques you could transfer from the world of traditional electronic trading. Of they're successful on much more competitive markets, no reason they wouldn't work on crypto.
Closi 5y ago
Benford's Law is a pretty established method of detecting fraud in forensic accounting.
- darawk 5y ago
  Benford's law does not apply here. Benford's law is designed to separate human generated numbers from truly random ones. The numbers generated by exchange trades are generated by humans choosing trade sizes. This entire methodology is a complete joke.
- srdev 5y ago
  Benford's Law requires that the numbers being analyzed typically occur over a wide distribution spanning orders of magnitude, which typically doesn't happen in trading (except over very long time periods).
  - Closi 5y ago
    Why would regulated and non-regulated exchanges differ in whether they follow Benford's law or not then? (As in the article)
- dustingetz 5y ago
  You don't even need to detect it. Name a single instance in human history where an unregulated and unaccountable industry didn't instantly degenerate into fraud. "2.5T" "dollars" (majority held by early insiders) is an incredible moral hazard
  - solveit 5y ago
    "I'm sure there is a lot of fraud" is very different from "This is the type of fraud that is going on and here is the evidence".
    - bluecalm 5y ago
      The difference matters for legal proceedings but not for much else, surely not for personal investment decisions.
PaulHoule 5y ago
It's hard to tell wash trading from legitimate trading. Because I'm involved with a committee on financial semantics I wound up learning a bit about swap trading. For stocks if you don't like your long or short position you can buy or sell and it is done. In the case of swaps if you don't like your position you write another swap contract that is the opposite of the one you don't like. Both are on the books. In the 2008 crisis the size of outstanding swap liabilities dwarfed the real economy, but when you added them all up they mostly canceled out, both in the aggregate and for almost all of the market participants. Looking at a situation like that which is hard to unravel people are going to make assumptions about the motives and ethics of the participants which are not substantiated.
- gillesjacobs 5y ago
  It will be nigh impossible to prove wash trading without the exchange being very obvious or primary trader identification. Famously, a Mt. Gox data leak actually proved wash trading on that exchange conclusively as same trader IDs took their own orders. [1] So there definitely is proven precedent in the crypto market. I am not saying it doesn't happen and isn't likely on unaudited/unregulated exchanges. I just want to highlight that the authors make very strong claims and alternative explanations should be explored. 1. https://dx.doi.org/10.2139/ssrn.3362153 https://dx.doi.org/10.2139/ssrn.3362153
- carnitine 5y ago
  The bigger factor in the size of the swap market dwarfing the size of the economy is due to the former being reported in terms of notional. I will happily enter into an interest rate swap with you on SOFR^-14 and a notional of USD 1 trillion.
- londons_explore 5y ago
  > but when you added them all up they mostly canceled out, Except they don't cancel when one party goes bankrupt and a bankruptcy court decides how the assets should be divided.
santiagobasulto 5y ago
I came looking for your comment. Someone applying some common sense to the “research”. Yet, the post has >400 points. Feels like these days anybody can post a paper and get uncountable widespread with 0 backings for their research. In nutrition this happens A LOT. Things like: “meat causes cancer in 70% of the population”. And then you read the paper and they did the study on 80 people between 60-90 years old. There’s just no scientific/statistic rigurosity.
- casi18 5y ago
  you can make something up at the speed of thought. refuting it takes time and effort. peer-reviewing even longer.
nostrademons 5y ago
Grid trading bots are all over the place. If you look at the crypto-trading subreddits you'll see plenty of posts about how some guy downloaded a bot and makes $300-500/day off of it. These are the new scr1pt k1dd13s; there are turn-key solutions to automate trading and anyone can use them.
yrral 5y ago
It's also very disingenuous for the title to say that 70% of the volume in the top crypto exchanges is wash trading when the 70% category they define are the least popular exchanges (they rank worse than 960 on the finance section of similarweb). Even more so because the regulated exchange and popular unregulated exchanges have 0 and mostly <20% wash trading respectively.
mgh2 5y ago
If I had vested interest in crypto, of course I will dismiss this paper as bogus

KarlKemp 5y ago

Their idea does show a pretty stark difference b/w "regulated" and "unregulated" exchanges, however, as would be expected if that activity is fraudulent in some way.

krisrm 5y ago
I'm no fan of crypto currencies (as my comment history will show), but does "different" imply "fraudulent" necessarily? or are there other factors at play? eg. easier APIs, more variance in crypto prices so that an automated trading strategy becomes potentially more lucrative?

MuffinFlavored 5y ago

> Automated trading strategies (e.g., "grid trading") are really popular Why? After buying and selling side fees, is it easy to make a profit in an automated way with crypto?

bluGill 5y ago
I don't know, but it seems to be. In general though, if there are easy profits to make it is because someone on the other side is willing to lose "a small amount of money" for a long time knowing that when things change they will make a ton of money fast, on the backs of all the people they lost to. For starters, if you can make money in automated trading, why would you not make all the possible money yourself instead of telling other people (or writing the software) and splitting the profit? This question is one I ask anytime someone mentions easy trading, and because I've never heard a good answer I stay away. To do better than average is possible, but it requires a lot of deep study.
- tommek4077 5y ago
  Because the retail market is big. If you personally buy or sell, you don't care for the "perfect" price.
- pontifier 5y ago
  I wrote a trading bot, it worked well for a while and made money until Mt Gox shut down. I open sourced it because I thought it might be interesting for others to see. I updated it for Bittrex, but didn't have enough capital to actually make it work. Now everything has gone up so much, and I'm bearish on crypto in general, so I don't want to have any money invested in it. That's why mine is available, and I'm not currently trying to keep it running.
mgaunard 5y ago
First, most good trading, crypto or not, is systematic, which is automated. Then, from what people have told me, crypto is a highly inefficient market so huge of potential for market-making strategies. Tons of arbitrage opportunities between the various venues, centralized and decentralized, mostly uninformed non-professionals so non-toxic flow, huge spreads, etc. It's like the traditional tradi'g world but 30 years in the past. "Grid trading" is apparently just a weird term for placing orders proactively on multiple levels to obtain a better queue position, useful for increasing edge capture on exchanges with price-time matching. There are a lot more sophisticated techniques you could transfer from the world of traditional electronic trading. Of they're successful on much more competitive markets, no reason they wouldn't work on crypto.

Closi 5y ago

Benford's Law is a pretty established method of detecting fraud in forensic accounting.

darawk 5y ago
Benford's law does not apply here. Benford's law is designed to separate human generated numbers from truly random ones. The numbers generated by exchange trades are generated by humans choosing trade sizes. This entire methodology is a complete joke.
srdev 5y ago
Benford's Law requires that the numbers being analyzed typically occur over a wide distribution spanning orders of magnitude, which typically doesn't happen in trading (except over very long time periods).
- Closi 5y ago
  Why would regulated and non-regulated exchanges differ in whether they follow Benford's law or not then? (As in the article)
dustingetz 5y ago
You don't even need to detect it. Name a single instance in human history where an unregulated and unaccountable industry didn't instantly degenerate into fraud. "2.5T" "dollars" (majority held by early insiders) is an incredible moral hazard
- solveit 5y ago
  "I'm sure there is a lot of fraud" is very different from "This is the type of fraud that is going on and here is the evidence".
  - bluecalm 5y ago
    The difference matters for legal proceedings but not for much else, surely not for personal investment decisions.

PaulHoule 5y ago

It's hard to tell wash trading from legitimate trading. Because I'm involved with a committee on financial semantics I wound up learning a bit about swap trading. For stocks if you don't like your long or short position you can buy or sell and it is done. In the case of swaps if you don't like your position you write another swap contract that is the opposite of the one you don't like. Both are on the books. In the 2008 crisis the size of outstanding swap liabilities dwarfed the real economy, but when you added them all up they mostly canceled out, both in the aggregate and for almost all of the market participants. Looking at a situation like that which is hard to unravel people are going to make assumptions about the motives and ethics of the participants which are not substantiated.

gillesjacobs 5y ago
It will be nigh impossible to prove wash trading without the exchange being very obvious or primary trader identification. Famously, a Mt. Gox data leak actually proved wash trading on that exchange conclusively as same trader IDs took their own orders. [1] So there definitely is proven precedent in the crypto market. I am not saying it doesn't happen and isn't likely on unaudited/unregulated exchanges. I just want to highlight that the authors make very strong claims and alternative explanations should be explored. 1. https://dx.doi.org/10.2139/ssrn.3362153 https://dx.doi.org/10.2139/ssrn.3362153
carnitine 5y ago
The bigger factor in the size of the swap market dwarfing the size of the economy is due to the former being reported in terms of notional. I will happily enter into an interest rate swap with you on SOFR^-14 and a notional of USD 1 trillion.
londons_explore 5y ago
> but when you added them all up they mostly canceled out, Except they don't cancel when one party goes bankrupt and a bankruptcy court decides how the assets should be divided.

santiagobasulto 5y ago

I came looking for your comment. Someone applying some common sense to the “research”. Yet, the post has >400 points. Feels like these days anybody can post a paper and get uncountable widespread with 0 backings for their research. In nutrition this happens A LOT. Things like: “meat causes cancer in 70% of the population”. And then you read the paper and they did the study on 80 people between 60-90 years old. There’s just no scientific/statistic rigurosity.

casi18 5y ago
you can make something up at the speed of thought. refuting it takes time and effort. peer-reviewing even longer.

nostrademons 5y ago

Grid trading bots are all over the place. If you look at the crypto-trading subreddits you'll see plenty of posts about how some guy downloaded a bot and makes $300-500/day off of it. These are the new scr1pt k1dd13s; there are turn-key solutions to automate trading and anyone can use them.

yrral 5y ago

It's also very disingenuous for the title to say that 70% of the volume in the top crypto exchanges is wash trading when the 70% category they define are the least popular exchanges (they rank worse than 960 on the finance section of similarweb). Even more so because the regulated exchange and popular unregulated exchanges have 0 and mostly <20% wash trading respectively.

mgh2 5y ago

If I had vested interest in crypto, of course I will dismiss this paper as bogus