Yesterday we have reported on the ‘Virtual Markets Integrity Initiative’, a report, compiled by the office of New York Attorney General (NYAG). The investigation suggests that crypto exchanges are prone to manipulation, lack transparency and cannot guarantee the security of their client funds. However, another concern that we did not cover is proprietary trading, utilized by half of the crypto trading platforms that voluntarily participated in the study.
Proprietary trading is an investment practice when an institution trades for its own direct market gain, instead of earning commission by matching trades of its clients. This basically means that the exchange is trading against its customers. Proprietary trading is common in traditional finance markets, as the trading desks at the exchange are trying to increase their commission profits. In addition, it is also commonly used to provide or increase liquidity on a security or other financial asset.
According to the initiative, “Apart from individual employee trading, several trading platforms themselves trade on their own venue in a proprietary capacity.“ The NYAG further claims that “Such activity […] requires a significant commitment to customer protections and transparency to remain in compliance with applicable laws”.
Half of the 10 exchanges that have agreed to participate in the research, admitted to trading on their own platform. These include Bitfinex, BitFlyer, Coinbase, Poloniex and Tidex. Other participants, namely Bitstamp, Bittrex, Gemini and Huobi claimed they do not engage in proprietary trading, while itBit did not disclose the information.
The NYAG report revealed that nearly 20 percent of the trading volume at Coinbase is the result of proprietary trading. Bitfinex and BitFlyer have also posted high numbers, with the exchanges involved in around 10 percent of the executed trades on their platform.
The NYAG warns that high levels of proprietary trading pose hidden risks for the exchange customers. The report claims that “Such high levels of proprietary trading raise serious questions about the risks customers face on those platforms. As a general principle, when a significant percentage of the volume in one or more assets on a venue is attributable to one source, customers face the risk that the availability of liquidity in those assets could change, without notice and at any time, including when liquidity is needed most – namely, in times of market volatility or rapid price movement.“
Coinbase has since issued an official response, with Mike Lempres, chief policy officer publishing an official blog post. The executive claimed the report findings were misinterpreted by the media, as, “Coinbase does not trade for the benefit of the company on a proprietary basis. In order to provide an easy-to-use customer experience, Coinbase Consumer quotes a price and then quickly fills the order from our exchange platform (Coinbase Markets). This takes advantage of the liquidity provided by the entire Coinbase ecosystem. When Coinbase executes these trades, it does so on behalf of Coinbase Consumer customers, not itself.“
He further added that “The volume figure stated in the report has been misreported in the media as “self-trading,” which is inaccurate. The figure represents customer-driven volume via Coinbase Consumer. Coinbase does not operate a proprietary trading desk, nor does it undertake market making actions.“
Image Source: “Flickr”
I have been following the crypto markets since mid 2017, just in time to witness the incredible surge of the digital asset industry. Fascinated by the potential of blockchain technology I’ve started to dig deeper and that’s how I ended up meeting the Toshi Times team. I hold a Political Science degree, therefore the crypto regulation development is particularly interesting for me. I’m also heavily involved with music, running my own label, a YouTube channel and working with distribution. People call blockchain the ‘Fourth Industrial Revolution’ and I believe it will change our daily lives in the coming years and we will have the front row seats to witness it.