Nicholas Merten on how markets are manipulated

We started our series on crypto market manipulation in our previous article. 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. In the first part Nick Merten talked about the most common method of market manipulation we find in crypto-currencies: pump & dump.

“The next topic we’ll talk about in regards to market manipulation has to do with something known as Market Making”, says Nick Merten in his video, moving on the second type of market manipulation that he lists in Category I.

 “This is done by people who are known as market makers and their job is as follows: to make a market. But to put this in simple English, this basically means that a high-level trader, someone with a lot of liquidity or, in this case, a lot of Bitcoin or Ethereum, will go through and start trading a specific crypto-currency, relatively back and forth. It’s important to state that in most cases market making isn’t illegal and serves important functions in regards to any given market, especially something like crypto-currencies.

The function of a market maker is to bring liquidity into a market that isn’t seeing high enough levels of volume to have steady trading or investing. The method of market making is commonly found but not limited to newly launched ICOs that hit exchange. The reason that they utilize market making is in order to bring liquidity to their newly launched crypto-currency that might be on a limited amount of exchanges or might be experiencing the issue of having a very spread out order book.

And this is where the market maker makes his profit. Not only will the market maker charge fees and commissions for the risks he is taking with his capital, but as he continues to acquire more and more of the crypto-currency and as liquidity comes into the market, he will use the benefit of the spread between the bid and the ask, the bid being the price that he purchased, as well as the ask where he is going to be selling it to new coming investors.

Now, it’s important to state that market makers aren’t bad apples and they’re serving a functioning role within markets to make them liquid and tradable. However, at the same time, they can leave symptoms behind that give off the impression that institutional investors or larger investors are getting involved in any given crypto-currency.

So, I recommend to all of you to look out for market maker volume. It’s not too hard to spot most of the time and in fact (see image below), not only does it tend to come out of nowhere with no major increase in price action but along with that, as well, the volume bars tend to be very similar on a daily basis”, says Nicholas Merten on Market Makers.

Last within Category I, in our next article, we are going to cover Nick Merten’s views on algorithms and the difference between general trading algorithms and hyper-frequency trading.




Image: screenshot from the linked video.

Zsolt Balló