Nicholas Merten on how markets are manipulated

This is the fourth chapter in our series on crypto market manipulation. This series is based on Nicholas Merten’s videos that are posted on his youtube channel, DataDash. Merten is one of the most acknowledged crypto experts with more than 300,000 subscribers on youtube.

If you want to watch his complete video on “How markets are manipulated”, click on the link at the bottom of the article.

Our articles in this series are summaries, that is, edited shorter versions, quoting what Nicholas Merten is talking about in his video.

With today’s article, we have arrived what Nick Merten calls Category II market manipulation.

This is what Nick Merten has to say about it:  “In Category 2, we're going to be talking about forms of market manipulation that are not only commonly found but are technically illegal under US securities law. The two methods of market manipulation we're going to be discussing about are wash trading and spoofing. Let's go ahead and take a look first at wash trading and what it entails.

Simply put the method of wash trading is a form of market manipulation when an investor or two coordinated investors simultaneously sell and buy the same financial instruments to create misleading artificial activity in the marketplace. Now, some might look at wash

trading and ask how it’s market manipulation and also who's to gain in the process. Well, it depends on who's doing the wash trading. It can be used for a variety of different reasons and

benefits. In traditional markets, the common users of wash trading are generally brokers aiming to generate more commission fees. However, as we step into crypto markets we see that wash trading is being used for a variety of different reasons. The biggest example of wash trading within crypto-currencies is most likely found within the exchanges, where many have not only been caught but many others have been accused of utilizing wash trading to push up high artificial levels of volume in order to attract investors.

This is why it gets the label of wash trading because the same exact asset is being exchanged by one individual between two different accounts or two select parties who have coordinated the wash trade /…/. Wash trading can also be used to manipulate price or lead to misconceptions and how a market is evaluating an underlying currency or asset. But it's important to note that this isn't an anomaly in crypto markets, and that in many cases, weekly even daily we can spot forms of wash trading happening without any oversight or regulation on the exchanges where it's being conducted.

Now, let’s take a look at the second form of market manipulation in Category 2, known as spoofing. The objective of spoofing can be to leave a bid or ask or an order to buy or sell that's not meant to execute on the open exchange. Spoofing can be used in a variety of ways to lead to misconceptions or manipulation within the order book, but the most common example that we tend to see in crypto markets is when a very large investor with a lot of Bitcoin, cash or other crypto-currency, usually a whale, goes about setting a limit or an ask order that's never meant to be fulfilled, however gives off the perception that there's a large amount of investors that are set to either buy or sell at a given price /…/.

The reason why this form of market manipulation is so powerful yet so deadly at many times is because it gives us the illusion that we know what the larger players are going to do. We can obviously see their orders in the order book, so that means that they're going to either sell or buy at those given orders. But if the large institutional whale can convince enough people to buy or sell before his order is executed, he can use tools such as high frequency trading to guarantee that his order does not get fulfilled and that he can cancel it before it's too late. This can leave a lot of investors burnt off of the misconception that there were institutions ready to buy or sell. Spoofing is a daily phenomena within the crypto-currency space. This is due to the fact that there's a lack of regulation or oversight on these exchanges and, because of this, spoofing can be found on not only a variety of exchanges but also in a variety of crypto-currencies outside of Bitcoin”, wraps up Nick Merten.

“The important takeaway from all this”, he says, “is to take the order book with a grain of salt and understand clearly that it can be manipulated by whales and large investors to give off false perceptions in the market.”

Nick Merten is promising to continue his series on market manipulation. When he does we will be here to share with you the essence of what he has to say.



Zsolt Balló