One of the biggest crypto exchange, which offers margins of 100x and a number of derivatives, has seemingly admitted to price manipulation and trading against its own customers with the activity carried out in broad daylight since April, yet apparently no one even noticed.
On April the 30th, one of the busiest crypto news day when the Consensus blockchain conference was going on and so much else, Arthur Hayes, CEO of Bitmex, said and we quote at some length:
“In order to entice others to provide liquidity, we funded an entity that would quote as soon as a new product listed…
Right now the activity of this affiliated entity is concentrated on the altcoin contracts. XBTUSD and the quarterly Bitcoin/USD futures contracts have plenty of liquidity…
The trading entity is a for-profit operation. However, their earnings are comprised of a service fee paid by the business, that is the BitMEX trading platform….
The market making desk earns the most if the exchange earns the most… The primary trading activity is providing two-sided liquidity on selected BitMEX products. The desk’s current focus is on increasing the liquidity on the altcoin contracts. The desk will also be the anchor market maker for the UPs and DOWNs products…
The head trader is Nick Andrianov. He is a former Deutsche Bank equity flow and exotics options trader…
Nick receives the business objectives from various senior members of BitMEX. The business and the market making desk work closely with the express goal to make every single BitMEX product as liquid as possible.”
Nick Andrianov currently describes his position as Business Development Manager at Bitmex, suggesting this is just a department within Bitmex rather than a subsidiary.
A market maker is someone who is willing to place a bid and ask (buy and sell) order at any price. The market maker, which is better known as a high frequency trader, usually makes money from the difference in the spread between the buy and sell order.
In this case, however, Bitmex is saying they are not meant to make any money from the spread. Even though they are a for-profit entity, if they make profits then they are meant to reduce their spreads between buy and sell orders.
That suggests Bitmex might be wash trading, which is defined as “a form of market manipulation in which an investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity in the marketplace.”
Bitmex does not admit that they fakely buy their own sell order, but they do say their focus is “on increasing the liquidity on the altcoin contracts.”
Why Bitmex is paying what looks like a department of their own “a service fee” is not clear, but some suggest that is a rebate of trading fees, which means this trading entity can trade on Bitmex for free, unlike all the other Bitmex customers.
It appears another privilege Bitmex’s trading entity has is privileged access to Bitmex’s trading platform. According to a pseudonymous Matthew Collins:
“There appeared to be another bot that was making consistently unprofitable trades, and could get orders in the market faster than anyone else during those dreadful exchange overloads.”
Bitmex’s exchange overloads are so frequent that they have been turned into a complete meme , but way more shocking may be that this trading desk is the only one that can short options on Bitmex. They say:
“Because no leverage is offered to sellers, it is very expensive from a capital perspective to make a market. In order to guarantee tight spreads at sufficient size, the BitMEX affiliated anchor market maker will be the only entity allowed to sell options initially.”
Their reason for giving themselves this considerable privilege is slightly comical, with Bitmex effectively saying the exchange overloads are because the platform can’t keep up with demand, so if only their own insider trading desk is allowed to short, then there is less pressure on their trading platform, or in their own words:
“One cause of the engine overload issue is that we have many market makers constantly updating quotes on currently listed products. This consumes a vast amount of precious engine capacity…
Hence, if only one market maker quotes on the UPs and DOWNs product, then the impact will not be meaningful on the engine.”
The above is what Bitmex themselves admit. What else goes on in this unregulated exchange is unclear, but its CEO, Arthur Hayes (pictured on the left), publicly behaves in a highly unprofessional manners and makes clear his disdain for “altcoins,” especially ethereum, the smart contracts platform.
In a recent “newsletter” sent to all Bitmex customers, he called ethereum a “double digit s***coin.” He further appeared to incite his customers to short eth. Has he also directed his trading desk to short ethereum?
Bitcoin’s price has remained relatively stable while ethereum and most other cryptos have recently fallen. Bitmex itself says their insider trading desk does not operate on bitcoin, only on “altcoins.”
Bitmex, moreover, is the only entity that can short certain options contracts, potentially bringing down price pressure. There are further unsubstantiated allegations they stop hunt traders, which Bitmex denies. But they seem to be admitting they fake volumes and create an artificial appearance of liquidity, with spreads on Bitmex usually a lot higher than other exchanges.
Just as they have seemingly admitted they trade against their own customers, although they do say their trading desk has no access to any information that other traders don’t, yet they do appear to have access to the trading engine when others don’t.
The unregulated entity is based offshore with some recently claiming they complained to the US Securities and Exchanges Commission (SEC). As ethereum is classified as a commodity, however, it is probably the Commodities and Trading Futures Commission (CFTC) that may have jurisdiction.
CFTC fined Bitfinex in 2016 for offering unregulated margins, even though Bitfinex is based offshore, and they have opened investigations on price manipulation of eth and bitcoin, but whether that includes Bitmex is unclear.