Bitfinex exchange owner admits to using inside information to trade on own platf

[General_A]

Yes I do understand how high frequency trading works. But this is still a classic definition of insider trading. Certain parties have access to information about select companies which is not yet publicly available through the SPI's of exchanges. With this information they can places trades which directly benefits them. Just because the timing is is milliseconds and not days/weeks does not alter the fact that this is a textbook definition of insider trading. I do know there is a massive debate on the issue, but any activity in which certain parties can benefit of knowledge gained before the public is insider trading.




P.S. I respect that you don't want to get drawn into a debate on the issue. Just giving my 2 cents.

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[DannyHamilton]

Yes I do understand how high frequency trading works.
- snip -

Glad to hear it.

Since BitStamp (and BitFinex, and all other known bitcoin exchanges) don't offer high frequency trading, the rest of your post is off-topic and irrelevant to this thread.

Meanwhile, the bitcoin exchanges (which are on-topic and relevant to this thread) are all able to engage in their own "insider trading" before the order book is updated.  Proper regulations and good audit practices from trusted third parties can significantly reduce the incentives and likelihood of exchanges engaging in such conduct.

[General_A]

Yes I do understand how high frequency trading works.
- snip -

Glad to hear it.

Since BitStamp (and BitFinex, and all other known bitcoin exchanges) don't offer high frequency trading, the rest of your post is off-topic and irrelevant to this thread.

Meanwhile, the bitcoin exchanges (which are on-topic and relevant to this thread) are all able to engage in their own "insider trading" before the order book is updated.  Proper regulations and good audit practices from trusted third parties can significantly reduce the incentives and likelihood of exchanges engaging in such conduct.

True that - my bad. Didn't mean to get so engrossed in the subject

[seriouscoin]

Agreed - though I would argue that must exchanges do participate in insider trading. Example: High frequency trading is only available if select parties have 'inside' information unavailable to the majority of participants.

Whether "high frequency" trading should be considered "insider" trading is a philosophical debate that depends a lot on what you mean by "insider" and what it is that you don't like about "insider trading".  I'm not going to get into such a philosophical debate at the moment (and I'm not going to indicate in this post which side of the debate I tend to agree with more).

However, when it comes to the specific type of "insider trading" I'm talking about where the exchange itself can easily take advantage with 0 risk, I'm specifically talking about using knowledge about orders that are being added to the order book before those orders are public knowledge.  With "high frequency" trading, the traders know information faster than those that aren't a selected participant, but they still don't know the information before it is in the order book.

The exchange however receives a request to add an order to the order book from a user.  At this point, their software knows about this order (and other orders) that WILL BE a part of the order book in a moment, but isn't a part of the order book yet.  This puts them in a position to make automatic trading decisions that guarantee a risk free profit.  They can effectively roll back time and place their orders before (or after) the orders that are being added to the order book, making sure that the orders are filled in a specific order that guarantees that they come out ahead with no risk to themselves at all.

As an extremely simple example:

Albert places a BUY order for 10 BTC at $250 each ($2500 order).
A fraction of a second later, Bob places a SELL order for 10 BTC at $249 each ($2490 order).

Under normal circumstances Albert's BUY order enters the order book, then Bob's SELL order fills Albert's BUY order.  Albert gains 10 BTC from Bob, and Bob gains $2500 BTC from Albert. The exchange gets a small fee from both of them for maintaining the order book and trading engine.

Under circumstances where the exchange is engaging in "insider trading", Albert's BUY order is held in memory for a fraction of a second before being added to the order book.  The software sees Bob's order coming in and holds that in memory as well.  The exchange then adds Bob's transaction to the order book first, and inserts their own BUY order to buy all 10 BTC from Bob at $249.  They then allow Albert's order into the order book and immediately following it they add their own order to SELL 10 BTC at $250.  Now Albert has received his 10 BTC, and paid $2500 for them, but Bob only received $2490.  The remaining $10 goes to the exchange completely risk free since they knew that both transactions were entering the order book and could arrange them to their own benefit.  Then on top of that, the exchange gets a small fee from both of them.

With many transactions being added to the order book, this process can be repeated all day long completely automated.  The exchange can essentially take money out of the pockets of the people placing market orders without the users ever realizing it.

I already have a solution to this which i have worked on for the past 2 yrs (and yes i'm aware bitcoin exchanges have been manipulating their orders since inception). Its a completely stateless realtime matching engine. I will decide to publish it thro an new exchange awaiting serious backers (not just fund but ppl with real reputations)

In stateless engine, every order entry and order matching is running at the chip cycles (real time), NO memory state to be manipulated.

Here is a bit explanation for the non tech members: stateful vs stateless
http://whatis.techtarget.com/definition/stateless

[funkenstein]

https://twitter.com/DoctorBitcoin/status/557526205709037568

The post was deleted on reddit but this guy saved it.

also see: https://bitcointalk.org/index.php?topic=930707.new#new

This is an expected behavior on unregulated exchanges ?

ftfy

[mayax]

why don't you use De-centralized exchangers?

[acp229]

Yes I do understand how high frequency trading works.
- snip -

Glad to hear it.

Since BitStamp (and BitFinex, and all other known bitcoin exchanges) don't offer high frequency trading, the rest of your post is off-topic and irrelevant to this thread.

Meanwhile, the bitcoin exchanges (which are on-topic and relevant to this thread) are all able to engage in their own "insider trading" before the order book is updated.  Proper regulations and good audit practices from trusted third parties can significantly reduce the incentives and likelihood of exchanges engaging in such conduct.

True that - my bad. Didn't mean to get so engrossed in the subject

It is difficult if not impossible to provide hard evidence of deliberate insider trading misconduct at bitcoin exchanges. That is not to say that there are no obvious signs that it is happening (at Bitfinex and some of the other large exchanges). I trade on more than 10 different exchanges and track "slippage" on each trade. Slippage occurs when trades are not executed as expected for one reason or another. I don't dwell too much on why it is happening and just respond to it by "penalizing" exchanges with significant execution slippage and re-route orders to other exchanges.

[turvarya]

Yes I do understand how high frequency trading works.
- snip -

Glad to hear it.

Since BitStamp (and BitFinex, and all other known bitcoin exchanges) don't offer high frequency trading, the rest of your post is off-topic and irrelevant to this thread.

Meanwhile, the bitcoin exchanges (which are on-topic and relevant to this thread) are all able to engage in their own "insider trading" before the order book is updated.  Proper regulations and good audit practices from trusted third parties can significantly reduce the incentives and likelihood of exchanges engaging in such conduct.

True that - my bad. Didn't mean to get so engrossed in the subject

It is difficult if not impossible to provide hard evidence of deliberate insider trading misconduct at bitcoin exchanges. That is not to say that there are no obvious signs that it is happening (at Bitfinex and some of the other large exchanges). I trade on more than 10 different exchanges and track "slippage" on each trade. Slippage occurs when trades are not executed as expected for one reason or another. I don't dwell too much on why it is happening and just respond to it by "penalizing" exchanges with significant execution slippage and re-route orders to other exchanges.

Do you care to share your list?

[acp229]

Yes I do understand how high frequency trading works.
- snip -

Glad to hear it.

Since BitStamp (and BitFinex, and all other known bitcoin exchanges) don't offer high frequency trading, the rest of your post is off-topic and irrelevant to this thread.

Meanwhile, the bitcoin exchanges (which are on-topic and relevant to this thread) are all able to engage in their own "insider trading" before the order book is updated.  Proper regulations and good audit practices from trusted third parties can significantly reduce the incentives and likelihood of exchanges engaging in such conduct.

True that - my bad. Didn't mean to get so engrossed in the subject

It is difficult if not impossible to provide hard evidence of deliberate insider trading misconduct at bitcoin exchanges. That is not to say that there are no obvious signs that it is happening (at Bitfinex and some of the other large exchanges). I trade on more than 10 different exchanges and track "slippage" on each trade. Slippage occurs when trades are not executed as expected for one reason or another. I don't dwell too much on why it is happening and just respond to it by "penalizing" exchanges with significant execution slippage and re-route orders to other exchanges.

Do you care to share your list?

Sure. We trade mostly on a subset of the following:

Bitstamp
Bitfinex
ANX
LakeBTC
Kraken
BTC-China
BTC-e
Cryptsy
Ok Coin
Coinsetter

I am debating putting together a more in-depth analysis on trade execution. If you are interested follow  @ https://twitter.com/LiquidXCoin or sign-up at liquidX.io

[AtheistAKASaneBrain]

Yes I do understand how high frequency trading works.
- snip -

Glad to hear it.

Since BitStamp (and BitFinex, and all other known bitcoin exchanges) don't offer high frequency trading, the rest of your post is off-topic and irrelevant to this thread.

Meanwhile, the bitcoin exchanges (which are on-topic and relevant to this thread) are all able to engage in their own "insider trading" before the order book is updated.  Proper regulations and good audit practices from trusted third parties can significantly reduce the incentives and likelihood of exchanges engaging in such conduct.

True that - my bad. Didn't mean to get so engrossed in the subject

It is difficult if not impossible to provide hard evidence of deliberate insider trading misconduct at bitcoin exchanges. That is not to say that there are no obvious signs that it is happening (at Bitfinex and some of the other large exchanges). I trade on more than 10 different exchanges and track "slippage" on each trade. Slippage occurs when trades are not executed as expected for one reason or another. I don't dwell too much on why it is happening and just respond to it by "penalizing" exchanges with significant execution slippage and re-route orders to other exchanges.

Do you care to share your list?

Sure. We trade mostly on a subset of the following:

Bitstamp
Bitfinex
ANX
LakeBTC
Kraken
BTC-China
BTC-e
Cryptsy
Ok Coin
Coinsetter

I am debating putting together a more in-depth analysis on trade execution. If you are interested follow  @ https://twitter.com/LiquidXCoin or sign-up at liquidX.io

Whats your opinion on Poloniex? I've moved everything there for my occasional altcoin daytrading, im paranoid about exchanges dissapearing these days, im not sure what to do, im starting to think i should put all on my local wallet but i want to daytrade.

[turvarya]

Yes I do understand how high frequency trading works.
- snip -

Glad to hear it.

Since BitStamp (and BitFinex, and all other known bitcoin exchanges) don't offer high frequency trading, the rest of your post is off-topic and irrelevant to this thread.

Meanwhile, the bitcoin exchanges (which are on-topic and relevant to this thread) are all able to engage in their own "insider trading" before the order book is updated.  Proper regulations and good audit practices from trusted third parties can significantly reduce the incentives and likelihood of exchanges engaging in such conduct.

True that - my bad. Didn't mean to get so engrossed in the subject

It is difficult if not impossible to provide hard evidence of deliberate insider trading misconduct at bitcoin exchanges. That is not to say that there are no obvious signs that it is happening (at Bitfinex and some of the other large exchanges). I trade on more than 10 different exchanges and track "slippage" on each trade. Slippage occurs when trades are not executed as expected for one reason or another. I don't dwell too much on why it is happening and just respond to it by "penalizing" exchanges with significant execution slippage and re-route orders to other exchanges.

Do you care to share your list?

Sure. We trade mostly on a subset of the following:

Bitstamp
Bitfinex
ANX
LakeBTC
Kraken
BTC-China
BTC-e
Cryptsy
Ok Coin
Coinsetter

I am debating putting together a more in-depth analysis on trade execution. If you are interested follow  @ https://twitter.com/LiquidXCoin or sign-up at liquidX.io

Good to see, that Kraken is on your list. That's where I buy my BTC.

[funkenstein]

Any unregulated unaudited exchange can engage in insider trading completely risk free very easily.  They can make a lot of money doing so.  It is so easy to do, and so easy to hide, that it would surprise me if any of them are not doing it.  This is one of several reasons that I avoid using any online exchanges.

Regulated and audited markets are just as corrupted if not more.

+1

[acp229]

Yes I do understand how high frequency trading works.
- snip -

Glad to hear it.

Since BitStamp (and BitFinex, and all other known bitcoin exchanges) don't offer high frequency trading, the rest of your post is off-topic and irrelevant to this thread.

Meanwhile, the bitcoin exchanges (which are on-topic and relevant to this thread) are all able to engage in their own "insider trading" before the order book is updated.  Proper regulations and good audit practices from trusted third parties can significantly reduce the incentives and likelihood of exchanges engaging in such conduct.

True that - my bad. Didn't mean to get so engrossed in the subject

It is difficult if not impossible to provide hard evidence of deliberate insider trading misconduct at bitcoin exchanges. That is not to say that there are no obvious signs that it is happening (at Bitfinex and some of the other large exchanges). I trade on more than 10 different exchanges and track "slippage" on each trade. Slippage occurs when trades are not executed as expected for one reason or another. I don't dwell too much on why it is happening and just respond to it by "penalizing" exchanges with significant execution slippage and re-route orders to other exchanges.

Do you care to share your list?

Sure. We trade mostly on a subset of the following:

Bitstamp
Bitfinex
ANX
LakeBTC
Kraken
BTC-China
BTC-e
Cryptsy
Ok Coin
Coinsetter

I am debating putting together a more in-depth analysis on trade execution. If you are interested follow  @ https://twitter.com/LiquidXCoin or sign-up at liquidX.io

Whats your opinion on Poloniex? I've moved everything there for my occasional altcoin daytrading, im paranoid about exchanges dissapearing these days, im not sure what to do, im starting to think i should put all on my local wallet but i want to daytrade.

I can't really say anything negative about Poloniex from a user experience standpoint. The trade execution is quite good - definitely better than cryptsy. Support at Poloniex has also been responsive and competent when I contacted them. I wouldn't recommend storing large balances on any exchange.

[HeliKopterBen]

Yes I do understand how high frequency trading works. But this is still a classic definition of insider trading. Certain parties have access to information about select companies which is not yet publicly available through the SPI's of exchanges. With this information they can places trades which directly benefits them. Just because the timing is is milliseconds and not days/weeks does not alter the fact that this is a textbook definition of insider trading. I do know there is a massive debate on the issue, but any activity in which certain parties can benefit of knowledge gained before the public is insider trading.


P.S. I respect that you don't want to get drawn into a debate on the issue. Just giving my 2 cents.

Bitcoin is not a stock and there is no inside information on the protocol itself because it is open source.  I suppose perhaps someone could trade on early info about a hard fork before an announcement by Gavin Andreesen, or something of that nature... but that would be a stretch.

[turvarya]

Yes I do understand how high frequency trading works. But this is still a classic definition of insider trading. Certain parties have access to information about select companies which is not yet publicly available through the SPI's of exchanges. With this information they can places trades which directly benefits them. Just because the timing is is milliseconds and not days/weeks does not alter the fact that this is a textbook definition of insider trading. I do know there is a massive debate on the issue, but any activity in which certain parties can benefit of knowledge gained before the public is insider trading.


P.S. I respect that you don't want to get drawn into a debate on the issue. Just giving my 2 cents.

Bitcoin is not a stock and there is no inside information on the protocol itself because it is open source.  I suppose perhaps someone could trade on early info about a hard fork before an announcement by Gavin Andreesen, or something of that nature... but that would be a stretch.

I am really amazed on how far you missed the point of this whole thread.
DannyHamilton wrote a nice summary on how it works(hint: it has nothing to do with the Bitcoin protocol)

Agreed - though I would argue that must exchanges do participate in insider trading. Example: High frequency trading is only available if select parties have 'inside' information unavailable to the majority of participants.

Whether "high frequency" trading should be considered "insider" trading is a philosophical debate that depends a lot on what you mean by "insider" and what it is that you don't like about "insider trading".  I'm not going to get into such a philosophical debate at the moment (and I'm not going to indicate in this post which side of the debate I tend to agree with more).

However, when it comes to the specific type of "insider trading" I'm talking about where the exchange itself can easily take advantage with 0 risk, I'm specifically talking about using knowledge about orders that are being added to the order book before those orders are public knowledge.  With "high frequency" trading, the traders know information faster than those that aren't a selected participant, but they still don't know the information before it is in the order book.

The exchange however receives a request to add an order to the order book from a user.  At this point, their software knows about this order (and other orders) that WILL BE a part of the order book in a moment, but isn't a part of the order book yet.  This puts them in a position to make automatic trading decisions that guarantee a risk free profit.  They can effectively roll back time and place their orders before (or after) the orders that are being added to the order book, making sure that the orders are filled in a specific order that guarantees that they come out ahead with no risk to themselves at all.

As an extremely simple example:

Albert places a BUY order for 10 BTC at $250 each ($2500 order).
A fraction of a second later, Bob places a SELL order for 10 BTC at $249 each ($2490 order).

Under normal circumstances Albert's BUY order enters the order book, then Bob's SELL order fills Albert's BUY order.  Albert gains 10 BTC from Bob, and Bob gains $2500 BTC from Albert. The exchange gets a small fee from both of them for maintaining the order book and trading engine.

Under circumstances where the exchange is engaging in "insider trading", Albert's BUY order is held in memory for a fraction of a second before being added to the order book.  The software sees Bob's order coming in and holds that in memory as well.  The exchange then adds Bob's transaction to the order book first, and inserts their own BUY order to buy all 10 BTC from Bob at $249.  They then allow Albert's order into the order book and immediately following it they add their own order to SELL 10 BTC at $250.  Now Albert has received his 10 BTC, and paid $2500 for them, but Bob only received $2490.  The remaining $10 goes to the exchange completely risk free since they knew that both transactions were entering the order book and could arrange them to their own benefit.  Then on top of that, the exchange gets a small fee from both of them.

With many transactions being added to the order book, this process can be repeated all day long completely automated.  The exchange can essentially take money out of the pockets of the people placing market orders without the users ever realizing it.

[HeliKopterBen]

I am really amazed on how far you missed the point of this whole thread.
DannyHamilton wrote a nice summary on how it works(hint: it has nothing to do with the Bitcoin protocol)

You seriously don't get it.  The best analogy would be if an employee of the NYSE traded shares in GLD, which is an exchange traded fund that tracks the price of gold.  You cannot have inside information on the precious metal gold just as you cannot have inside information on the bitcoin core protocol. 

Exchange employees can only trade based on information about trades and order books, which is not insider trading in the traditional sense.  The insider trading 2.0 example with HFT may be applicable.

[B.A.S.]

Give it a rest Danny.

In the traditional sense (using the definition), the case of Bitfinex is not insider trading. The very definition negates this possibility; however, all can agree Bitfinex is using inner information (knowledge of the order books, processing transactions, etc.) to their advantage.

Is this illegal? No. Is it unfair? Yes, if you think morality has anything to do with BTC.

Caveat: If you believe this to be unfair, push for regulation. This will take care of your problem for argument's sake, but in the process you will lose all ability to play the game. As soon as the playing field is regulated, you will have no advantage. You may get secure trading, but you will have simultaneously given away your say in anything.