All possible options of the manipulations in the financial markets and, in particular in cryptocurrency

All possible options of the manipulations in the financial markets and, in particular in cryptocurrency

Common

As many people know, the cryptocurrency market is subject for manipulations. Some representatives of the community note that this is its feature, which doesn`t allow it to develop at the proper level. Others argue that in fact, in any markets, a manipulator draws graphics, but it is simply more expressed on cryptocurrency market. Anyway, a new emerging industry lacks proper regulation and implementation of anti-manipulation systems that are actively practiced in traditional financial markets.

In this article, we offer to get acquainted with all the possible kinds of manipulations that may exist in the financial markets and cryptocurrency in particular.


 

Introduction

 

We already got acquainted with the hypothesis of an effective market in the previous article. In short, the high information efficiency of the market is ensured under four conditions:

 

1) All participants receive information the same way;
2) There are no factors that impede trading;
3) Transactions made by individuals cannot affect quotations;
4) All bidders act rationally, wanting to get the maximum possible profit.

 

The theory says that in the framework of the high information efficiency of the market, it is impossible to obtain super-profit (income above the segment average) over a long distance. However, the cryptocurrency market doesn`t have high information efficiency, due to a violation of the first and third item. But the fourth is also partially violated, because many bidders don`t have the proper knowledge, and accordingly make silly mistakes.

 

New information immediately affects pricing in an ideally efficient market.


 

But in fact, even real markets (for example, tangible goods) in the short term don`t have high information efficiency. There is no need to look for an example. Back in 2007, Apple introduced its first smartphone and for many years completely monopolized this segment, earning superprofits. Only after a certain time, competitors began to appear, which reduced the profitability of the Cupertinians. Thus, we can conclude that over a long distance, markets tend to be efficient because they lose their initial superprofits.

Why such a long introduction? We are smoothly approaching our topic. The cryptomarket also has superprofits at the moment, because it`s a subject for manipulations. But it strives for efficiency, so the excess profitability, to which many traders are already accustomed, will gradually disappear.

 

 

What are the manipulations exist?

 

There is no official definition that can describe manipulations. The US Securities and Exchange Commission (SEC) offers the following terminology:

«Any actions aimed at creating false targets».

 

Manipulations are used for:

 

1) Increase quotations
2) Price stabilization
3) Lower quotations

 

The first version is the most common. The manipulator’s task is to sell the asset as expensive as possible to new investors. For this, various manipulations are used. For example, in a previous article, we looked at an example of trading robots, which in 2013 raised the price of Bitcoin from $ 150 to $ 1000 by wash trading.

Price stabilization is needed so that the manipulator can gain a position at an acceptable average execution price.


Well, a price decrease is used for making a profit by opening short positions by using leverage. This is a rather rare kind of manipulation, since more often prices fall by themselves after the manipulator has already left the market.

 

 

                                                 Classification of manipulations

 

We already considered the kinds of manipulations in a previous article, but in a compressed form.

 

1) Manipulation based on action.
2) The manipulation based on information.
3) The manipulation based on bidding.

 

The entire previous article was devoted to the third kind of manipulation, so we will not focus on this. Let’s just refresh it in the memory.

 

 – Wash trades – a transaction without changing the owner of the asset. It occurs most often. Fictitious trading is needed to create a false impression of liquidity of trading and trading volume.

– Matched orders – it is almost the same as wash trades.

– Spoofing /painting the tape – submitting a large number of applications and their subsequent cancellation. It is necessary to collect information on current liquidity.

– Flashing – short-term showing of quotations.

– Layering – it is almost the same as spoofing.

 

 

Manipulation based on action (action-based manipulation)

 

In this option, company representatives carry out any actions that affect the pricing of the asset. For example, on April 18 of last year, information appeared on the ICO website of the Savedroid project that was about the termination of the startup. All collected money disappeared as well as the CEO of the company.

The ICO was completed on March 9th. That is, everyone who wanted to buy tokens already bought them. But then such information comes. What have investors done? Sure, they ran to over-the-counter platforms to sell project tokens at any affordable price.

It would seem that everything is logical, but the next day a refutation came out. In fact, no one disappeared anywhere, and the project works in standard mode. Who bought the project tokens from investors for a pittance? One can only guess. Probably, these were people controlled by the Savedroid team.


 

 

Manipulation, which is based on information (information-base manipulation)

 

 

In this option, people close to the project disseminate false information to mislead investors. In general, this species can be divided into two subspecies:

– Manipulation based on insider information (insider trading).
– Manipulation of information and financial indicators.

 

 

                                                 Insiders

 

Many already know the concept of «insider». People, who are the first getting information about a company, can use it for personal gain. In traditional markets, law prohibits this practice, but it is still exist. It is doubly exist on cryptocurrency.

How it works? Simple enough. The manipulator knows in advance some news, whether it is negative or positive, and then buys or sells the asset through controlled entities.

There is no need to look for an example. Last year, Bitcoin Cash began to grow a few hours before the announcement of the news about its listing on the Coinbase exchange. As a result, a class action lawsuit for insider trading was filed on the company. The management of the exchange didn`t deny that it could be carried out by at least one of the employees.


 

 

Manipulation of information and financial indicators.

 

The second option is more complicated, but also used in many financial markets. On the stock market, it looks like this: company representatives deliberately distort information in reports, thereby creating a favorable view of the company condition.

However, this is prohibited in traditional markets, and the SEC is on guard (if we talk about the US stock market). But nobody regulates cryptocurrency market. Startup, which were conducted by ICO, are not required to report on the financial condition of the company.

In 2017, an interesting trend was observed. Companies that substituted the word «blockchain» for their name began to grow dramatically by hundreds percent. In fact, their business model didn`t change and profits don`t grow along with the growth of the stock price, so such actions can also be considered manipulations of information and financial indicators.

One striking example is Riot Blockchain Company. After adding the word «blockchain» to the title at the end of 2017, the stock price rose from $ 4.5 to $ 38.6. In February, three class action lawsuits were filed against it, but subsequently the SEC became interested in the company.


How can a manipulator get profit from such manipulations? The most commonplace example is Pump & Dump (Ramping) schemes. The point is quite simple. At first, it is bought active on the bottoms by using various manipulations to stabilize prices in a narrow price range. Then, an information vacuum is created in the information space, signaling the growth of the asset. But then, not without the help of the manipulator, the price begins to rise rapidly, and it is selling out at that moment. As a result, there is the profit of the manipulator and the losses of retail inexperienced investors.

There is no need to look for an example. Probably, many remember the tweets of John McAfee. He wrote the name of some ICO and the price of these coins «shot up» sharply.
Often, such schemes are made with the help of various groups in popular instant messengers. The point is similar. At first, the organizers of the pump do their purchases. Then they announce the name of the token. Investors are running to buy it, but the organizers sell it out. For such manipulations, low liquid assets are often used.

 

 

Regulation and the fight against manipulations

 

It should be understood that each kind requires an individual approach. In a previous article, we looked at the fight against action-based manipulations. To do this, it is enough to implement a special software that has been used in traditional markets for more than a decade. We can speak about a full-scale war with this phenomenon only after the legislative regulation of the cryptocurrency market will appears. There must be a punishment for such actions, otherwise who prevents manipulating even the exchanges themselves, profiting from their own customers?

Therefore, for fighting with manipulations, at first it is necessary to prepare a regulatory framework. As for it, many countries are gradually moving in this direction, but not as fast as desired.

We will follow the further development of events in that area.

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As many people know, the cryptocurrency market is subject for manipulations. Some representatives of the community note that this is its feature, which doesn`t allow it to develop at the proper level. Others argue that in fact, in any markets, a manipulator draws graphics, but it is simply more expressed on cryptocurrency market. Anyway, a new emerging industry lacks proper regulation and implementation of anti-manipulation systems that are actively practiced in traditional financial markets.

In this article, we offer to get acquainted with all the possible kinds of manipulations that may exist in the financial markets and cryptocurrency in particular.


 

Introduction

 

We already got acquainted with the hypothesis of an effective market in the previous article. In short, the high information efficiency of the market is ensured under four conditions:

 

1) All participants receive information the same way;
2) There are no factors that impede trading;
3) Transactions made by individuals cannot affect quotations;
4) All bidders act rationally, wanting to get the maximum possible profit.

 

The theory says that in the framework of the high information efficiency of the market, it is impossible to obtain super-profit (income above the segment average) over a long distance. However, the cryptocurrency market doesn`t have high information efficiency, due to a violation of the first and third item. But the fourth is also partially violated, because many bidders don`t have the proper knowledge, and accordingly make silly mistakes.

 

New information immediately affects pricing in an ideally efficient market.


 

But in fact, even real markets (for example, tangible goods) in the short term don`t have high information efficiency. There is no need to look for an example. Back in 2007, Apple introduced its first smartphone and for many years completely monopolized this segment, earning superprofits. Only after a certain time, competitors began to appear, which reduced the profitability of the Cupertinians. Thus, we can conclude that over a long distance, markets tend to be efficient because they lose their initial superprofits.

Why such a long introduction? We are smoothly approaching our topic. The cryptomarket also has superprofits at the moment, because it`s a subject for manipulations. But it strives for efficiency, so the excess profitability, to which many traders are already accustomed, will gradually disappear.

 

 

What are the manipulations exist?

 

There is no official definition that can describe manipulations. The US Securities and Exchange Commission (SEC) offers the following terminology:

«Any actions aimed at creating false targets».

 

Manipulations are used for:

 

1) Increase quotations
2) Price stabilization
3) Lower quotations

 

The first version is the most common. The manipulator’s task is to sell the asset as expensive as possible to new investors. For this, various manipulations are used. For example, in a previous article, we looked at an example of trading robots, which in 2013 raised the price of Bitcoin from $ 150 to $ 1000 by wash trading.

Price stabilization is needed so that the manipulator can gain a position at an acceptable average execution price.


Well, a price decrease is used for making a profit by opening short positions by using leverage. This is a rather rare kind of manipulation, since more often prices fall by themselves after the manipulator has already left the market.

 

 

                                                 Classification of manipulations

 

We already considered the kinds of manipulations in a previous article, but in a compressed form.

 

1) Manipulation based on action.
2) The manipulation based on information.
3) The manipulation based on bidding.

 

The entire previous article was devoted to the third kind of manipulation, so we will not focus on this. Let’s just refresh it in the memory.

 

 – Wash trades – a transaction without changing the owner of the asset. It occurs most often. Fictitious trading is needed to create a false impression of liquidity of trading and trading volume.

– Matched orders – it is almost the same as wash trades.

– Spoofing /painting the tape – submitting a large number of applications and their subsequent cancellation. It is necessary to collect information on current liquidity.

– Flashing – short-term showing of quotations.

– Layering – it is almost the same as spoofing.

 

 

Manipulation based on action (action-based manipulation)

 

In this option, company representatives carry out any actions that affect the pricing of the asset. For example, on April 18 of last year, information appeared on the ICO website of the Savedroid project that was about the termination of the startup. All collected money disappeared as well as the CEO of the company.

The ICO was completed on March 9th. That is, everyone who wanted to buy tokens already bought them. But then such information comes. What have investors done? Sure, they ran to over-the-counter platforms to sell project tokens at any affordable price.

It would seem that everything is logical, but the next day a refutation came out. In fact, no one disappeared anywhere, and the project works in standard mode. Who bought the project tokens from investors for a pittance? One can only guess. Probably, these were people controlled by the Savedroid team.


 

 

Manipulation, which is based on information (information-base manipulation)

 

 

In this option, people close to the project disseminate false information to mislead investors. In general, this species can be divided into two subspecies:

– Manipulation based on insider information (insider trading).
– Manipulation of information and financial indicators.

 

 

                                                 Insiders

 

Many already know the concept of «insider». People, who are the first getting information about a company, can use it for personal gain. In traditional markets, law prohibits this practice, but it is still exist. It is doubly exist on cryptocurrency.

How it works? Simple enough. The manipulator knows in advance some news, whether it is negative or positive, and then buys or sells the asset through controlled entities.

There is no need to look for an example. Last year, Bitcoin Cash began to grow a few hours before the announcement of the news about its listing on the Coinbase exchange. As a result, a class action lawsuit for insider trading was filed on the company. The management of the exchange didn`t deny that it could be carried out by at least one of the employees.


 

 

Manipulation of information and financial indicators.

 

The second option is more complicated, but also used in many financial markets. On the stock market, it looks like this: company representatives deliberately distort information in reports, thereby creating a favorable view of the company condition.

However, this is prohibited in traditional markets, and the SEC is on guard (if we talk about the US stock market). But nobody regulates cryptocurrency market. Startup, which were conducted by ICO, are not required to report on the financial condition of the company.

In 2017, an interesting trend was observed. Companies that substituted the word «blockchain» for their name began to grow dramatically by hundreds percent. In fact, their business model didn`t change and profits don`t grow along with the growth of the stock price, so such actions can also be considered manipulations of information and financial indicators.

One striking example is Riot Blockchain Company. After adding the word «blockchain» to the title at the end of 2017, the stock price rose from $ 4.5 to $ 38.6. In February, three class action lawsuits were filed against it, but subsequently the SEC became interested in the company.


How can a manipulator get profit from such manipulations? The most commonplace example is Pump & Dump (Ramping) schemes. The point is quite simple. At first, it is bought active on the bottoms by using various manipulations to stabilize prices in a narrow price range. Then, an information vacuum is created in the information space, signaling the growth of the asset. But then, not without the help of the manipulator, the price begins to rise rapidly, and it is selling out at that moment. As a result, there is the profit of the manipulator and the losses of retail inexperienced investors.

There is no need to look for an example. Probably, many remember the tweets of John McAfee. He wrote the name of some ICO and the price of these coins «shot up» sharply.
Often, such schemes are made with the help of various groups in popular instant messengers. The point is similar. At first, the organizers of the pump do their purchases. Then they announce the name of the token. Investors are running to buy it, but the organizers sell it out. For such manipulations, low liquid assets are often used.

 

 

Regulation and the fight against manipulations

 

It should be understood that each kind requires an individual approach. In a previous article, we looked at the fight against action-based manipulations. To do this, it is enough to implement a special software that has been used in traditional markets for more than a decade. We can speak about a full-scale war with this phenomenon only after the legislative regulation of the cryptocurrency market will appears. There must be a punishment for such actions, otherwise who prevents manipulating even the exchanges themselves, profiting from their own customers?

Therefore, for fighting with manipulations, at first it is necessary to prepare a regulatory framework. As for it, many countries are gradually moving in this direction, but not as fast as desired.

We will follow the further development of events in that area.

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