Is it possible for an exchange to manipulate prices for own profit?

[btcusr]

Is it possible for Mtgox, or some other exchange to manipulate BTC price, by introducing fake buy / sell orders?

As far as I know, all trades that happen within exchange need not be logged in to block chain. Even if it is logged in blockchain, it is equally impossible to know the exchange rate. 

[MoonShadow]

Of course it's possible.  You're trusting that the exchange sites are honest.  These trades are onsite, not on the blockchain, so there is no way to be certain that they are not, in practice, manipulating the exchange prices to their own benefit.

I've pretty much assumed that they do this as a matter of course for three years, but whatever they might actually be doing, doesn't shift the official price by much or for long.  Any bot making trades over a one cent move still makes money.

[Stephen Gornick]

Is it possible for Mtgox, or some other exchange to manipulate BTC price, by introducing fake buy / sell orders?

Possible?   Sure.  There's no information disclosed as to which account has placed an order so it is entirely within the realm of possibilities for an exchange to be engaged in attempts to manipulate the price without any of us having a clue it is not a legit customer order.  What neutralizes that is that there are competing exchanges.   Price is determined by systemic supply and demand, so if an exchange has sell orders priced below another, arbitrage occurs and those cheaper coins will be bought and moved to markets where they are valued at a greater level.  The same thing happens at exchanges where buy orders are higher -- coins will get transferred there and sold, and the markets will generally equilibrate.

Now not all exchanges offer the same fees, set of features, and conveniences so there could consistently be differences in price.  For instance, lately bids at BitMe are above those at Mt. Gox, presumably because USD funds can be transferred to BitMe using a cash deposit method at a Chase bank branch.  There is greater demand for coins at that particular exchange than supply from those providing arbitrage, likely due to increased volumes occurring resulting from this recent rally.

Exchanges know information such as the the time and amount of customer deposits so at best it would be unethical for them to trade against their customers based on that information.  In most jurisdictions this would also be illegal.    

Exchanges make their money from exchange trading fees and those fees increase from larger volumes that come from operating an efficient market.  Thus it is against their long term ambitions to be manipulating price for a short-term gain.

Also, if price manipulation with fake orders was occurring we would hear more reports of orders placed not getting executed at the expected price.''

Either way, we aren't forced to buy or sell, so simply if the price on one exchange doesn't suit you simply don't trade there.

[btcusr]

Is it possible for Mtgox, or some other exchange to manipulate BTC price, by introducing fake buy / sell orders?

Possible?   Sure.  There's no information disclosed as to which account has placed an order so it is entirely within the realm of possibilities for an exchange to be engaged in attempts to manipulate the price without any of us having a clue it is not a legit customer order.  What neutralizes that is that there are competing exchanges.   Price is determined by systemic supply and demand, so if an exchange has sell orders priced below another, arbitrage occurs and those cheaper coins will be bought and moved to markets where they are valued at a greater level.  The same thing happens at exchanges where buy orders are higher -- coins will get transferred there and sold, and the markets will generally equilibrate.

Wondering would it be great, if bitcoin-otc could also execute orders automatically. 

[yucca]

I don't understand how they could do it? wouldn't it be difficult for an exchange to widen the spread without users seeing it? After all the buy/sell price is published realtime, one only need place a buy and/or sell order to check it. Am I missing something?

[akspecs]

If an exchange starts lying about bid / ask prices, it will forever lose it's integrity in the BTC community.  I would expect it to be very unwise, and as stated earlier there are a few BTC exchanges which make competition work in our favor.

Plus, without any manipulation the exchange makes money through it's rather steep comission.  There is also a bid/ask spread which gives the exchange another source of profit.  Once liquidity increases, this gap will decrease as orders can reasonable be routed from one user to the next.  Until then you will see the exchanges benefiting from this bid/ask spread.  Sometimes it's within a few cents, but often under low volume environments you'll see it as high as a few dimes.

In the end, this is how an exchange operates.  In Chicago, NY, and other big time exchanges where stocks, options, futures, etc... are traded there is always a slight spread in bid ask spread, and when the markets are very liquid they are almost negligible.  Facebook stocks trades with a 1 cent spread during the day.  That's because retail and insitutional users provide sufficient liquidity and market makers (MM) are rather hands off.  But when liquidity lacks, you will see larger spreads.  When the day comes where we see a million USD worth of bitcoin exchange, we can expect very small bid/ask spreads - much smaller then today.  When the day comes where we see tens of millions of USD worth of bitcoin exchange, then the bid/ask spread will be almost negligible.

EDIT:

In the end, what you are talking about isn't really manipulation - it's just how market makers on an exchange operate.  In BTC there aren't really official MM's, but if there were it would benefit the community with liquidity.

[whitenight639]

The exchanges like mt gox make 0.6% on every transaction so its in there interest to not manipulate it and just work on volume, it is of little consequence to them if the trades are profit or loss making to the trader.

I think because of the relatively low trading volume people that have large amounts of bitcoin can move the markets and gain but it creates bigger spreads which makes speculation more profitable for others, which in turn narrows the spread, its self adjusting, until we see lots of computer, high volume trading this kind of manipulation will be possible, I wish I had more Bitcoin cos i know i could make a killing.

[btcusr]

I don't understand how they could do it? wouldn't it be difficult for an exchange to widen the spread without users seeing it? After all the buy/sell price is published realtime, one only need place a buy and/or sell order to check it. Am I missing something?

May be mtgox won't prevent users from entering orders, but it surely can include fake buy and sell orders.

Lets hope they are not doing it, but if they do / did, then there are no way to prove.