Wash trading’ plagues unregulated crypto exchanges: NBER study

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(Kitco News) – Unregulated crypto exchanges, where the overwhelming majority of crypto transactions take place, are consistently engaging in wash trade to increase, according to a new study by researchers at the U.S. National Bureau of Economic Research. profits and inflate volumes.

In the Crypto Wash Trading working paper, authors Lin William Cong, Xi Li, Ke Tang and Yang Yang analyzed cryptocurrency transaction information in the TokenInsight database of 29 major exchanges, including Binance, Coinbase and Huobi, as well as lesser-known exchanges from July 9 to November 3, 2019 for proof of washing exchange.

The authors define shadow trading as investors simultaneously selling and buying the same financial assets to create artificial activity in the market, which distorts prices, volume and volatility, and affects investor confidence and participation in financial markets. .

The exchanges were chosen based on their ranking on third-party websites, representativeness, and API compatibility, and they were ranked as Tier 1 (ranked in the top 700 in the finance/investment section of SimilarWeb.com and level 2 (all ranked outside the top 960. The authors focused on transactions of Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC) and Ripple (XRP), the four most traded cryptocurrencies for US dollars at the time.

In order to detect fictitious trading patterns, the authors used several approaches that are not likely to be affected by dispersed trading strategies, exchange characteristics, or asset class specifics.

Our first key finding is that shadow trading largely exists on unregulated exchanges but is absent on regulated exchanges, they wrote. We consistently find abnormal trading patterns only on unregulated exchanges, with Tier 1 exchanges failing over 20% of tests and Tier 2 exchanges failing over 60%.

In addition to identifying exchanges that regularly engage in shadow trading, the authors also quantified the share of total shadow trading volume represented on each exchange.

We find that wash trade volume, on average, reaches 77.5% of total trade volume on unregulated exchanges, with a median of 79.1%, they wrote. In particular, fictitious trades on the twelve Tier 2 exchanges are estimated at more than 80% of the total trading volume, which is still above 70% after accounting for observable exchange heterogeneity.

The authors wrote that these percentages represent more than $4.5 trillion in fictitious trades in spot markets and more than $1.5 trillion in derivatives markets in the first quarter of 2020 alone.

They also measured the impact of wash trading on stock exchange rankings. Using historical ranking and trading volume information from CoinMarketCap, the authors showed that exchanges with a total reported volume of 70% wash trades rose 46 positions in the rankings.

They also found that an exchange wash trade is positively correlated with its short-term quoted cryptocurrency prices, and that longer-established exchanges with more users do less wash trade, while smaller exchanges have short-term incentives to wash trade without getting too much out of it. Warning. They added that wash trading is positively predicted by returns and negatively predicted by price volatility.

The authors noted that they saw very little evidence of bogus trading on regulated exchanges. While current trading incentives and ranking systems fuel rampant washout trading on unregulated exchanges, regulated exchanges, having committed considerable resources to compliance and licensing and facing severe penalties for manipulation of the market, do little washing trade, they wrote.

They conclude that this study provides a cautionary tale for regulators around the world and highlights the importance of regulation in emerging industries, the importance of adjusting volumes to account for shadow trade in other studies, and the usefulness of statistical tools and behavioral benchmarks for forensic finance. and fraud detection.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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