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November 10, 2020

Market Spotlight

Why fake cryptocurrency trading data is still a problem with flovtec

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Nisa spoke with David Lifchitz, managing partner and CIO at ExoAlpha, and Anton Golub, founder and CEO of flovtec, about quantitative funds and traders migrating from the traditional markets to crypto markets in recent years. Among the themes they discussed was the strategies that lend themselves to cryptocurrency trading and those that do not, in response to which ExoAlpha’s Lifchitz said,

(25:20) “The market infrastructure is not ready yet for high frequency trading. And in terms of the behavior of crypto, there are still illiquid vs. traditional assets. So the trends tend to last longer than in the traditional assets. So for all the trend following…strategies tend to do well in that environment for this asset class at the stage that they are right now. But just a few years ago, when they were even less liquid, it was a lot harder for them to track them. But now there are more liquid products, options and futures of these assets. It basically makes it easier to apply essentially CTAs trading strategies and also market neutral and or market making strategies…But we are not yet at the point of what we can find or what we can do with traditional assets especially in terms of execution and high frequency execution.”

flovtec’s Anton Golub addressed the issue of fake cryptocurrency trading data, which also refers to as ghost volume and says that it has been an ongoing issue in the digital asset space.

(27:10) “I can kind of share our experience with regard to fake or ghost volume, how we see it. And indeed this has been somewhat of an issue actually with the digital asset space. There is this ongoing theme and discussion around, there is a lot of fake volume, or just nonexistent and the volume numbers that you see being not representative of what’s actually happening. So I have to actually relate to it from an investment manager perspective. The fake volume, actually you can actually identify it quite easily and then you can shy away from the exchanges that do this kind of practice. But then we always wonder how does it reflect when it really matters? And I’m talking about highly volatile situations where the markets move a lot…and then the question is like from all this fake volume that all of a sudden isn’t there, you can’t do anything with it. Then the question is where can you actually go to trade where this highly volatile environment when you realize the fake volume, these fake volumes don’t actually help you at all. And you actually realize there’s only one or two trading venues that when the volt markets are extremely high, that really show solid liquidity.”

Nisa noted that it’s clearly easier to manipulate smaller market cap coins, asking if there are any tricks that are being deployed that might be considered illegal in more regulated markets. ExoAlpha’s David Lifchitz said they’ve seen a few scams, including one pump and dump scam that that involved Dogecoin, adding:

(30:46) “What we are seeing I think it was early September, there’s been a sort of flash crash, bitcoin went down 10-15%…in just five minutes…When the markets are nearing technical points…or if you re crypto hitting resistance or very close to a breakout level, and then you can, basically, if you have enough basically size to trade, you can build stealth positions in crypto. So you buy, and then when you have a big enough position…you sell some futures in the same position stealthily. So you won’t basically push the market downward. And then at some point when you are loaded on the short futures, you just drop in a market order, a big chunk of your coin in the spot market, that will put pressure on the order book. And so your order will basically hit the bid/ask…and in this case the bids. And then you basically push down the market. But because you are short the futures, you are basically making money on the move that you were the one that triggered. You knew what it was doing. And then you cover your shorts when you are at the end. And then you basically made a nice profit by manipulating the market. This is very illegal with the traditional markets. As Anton said, there is no policy for crypto markets so far. And so it’s still the Wild, Wild West in crypto trading.”

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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