Nicholas Merten on how markets are manipulated

This is the third 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. In the first part Nick Merten talked about the most common method of market manipulation we find in crypto-currencies: pump & dump. And the second chapter focused on Market Making.

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

 “Many people still operate under the misconception that markets are generally run by human participation. However the facts tell another story. And we can see that in traditional markets there’s been a recent dominance of algorithms or BOTS trading back different types of assets and currencies and the same is going to be for crypto-currencies, even though it still remains as a relatively human market.

That doesn’t mean we should ignore the unhuman aspect of it. Let’s go ahead and focus in on basic trading algorithms first. Trading algorithms at their core are simply programs that have been coded in languages like Python, to set an execution of an action. We could think of this in a simple if-then scenario. If XYZ currency hits a specific price, then buy or sell. And if you continue to research just how complex you can get with building algorithms you can start to understand why they’re so important and play a massive role in modern-day markets. /…/ And at the end of the day, the programmer who's behind the bot, hopes that he'll be able to have more winning trades than losing, and provide a nice profit from the funds that he's provided to the trading algorithm.

But it's important to note that algorithms offer a set of benefits that humans simply can't live up to, including the ability to cut out all emotion and follow strict rules, as well as being able to trade at a very high frequency. Speaking of high frequency trading, let's go ahead and talk about what high frequency trading really is and what its implementations really are.

To put it simple, high frequency trading operates much like that of the bots we were discussing earlier. However, unlike most trading algorithms, high frequency trading puts a high emphasis not only on following a certain set of rules and objectives, but also beating others to the market at a very high frequency and speed, in order to execute transactions before others. /…/ The shocking reality about all of this is that it happens within milliseconds if not microseconds. /…/”

“Now, the profit might not seem like much at first”, says Nicholas Merten, “but given the fact that the time to execution for trade is so small and the fact that the algorithm can go about doing multiple trades throughout the day, these small profits can truly start to add up and provide a wonderful opportunity for those who can take advantage of the time delay between other participants in the market.”

According to Nick Merten, at the moment in crypto-currency markets there isn't too much hyper frequency trading going on, however he has no doubt that in the next few months and years this type of trading activity is going to become more and more typical.

This is what concludes Category I. In Category II we're going to be talking about forms of market manipulation that are less known by average traders and investors and can lead to serious impacts on markets.



Zsolt Balló