While deciding whether a crypto exchange is good or bad, 2 factors hold the utmost importance in addition to various other factors, I.e. trade volume of the exchange and its liquidity.
Unfortunately, both of these measuring scales can be faked by exchange through Wash Trading.
So, let us understand what is wash trading and how you can save yourself from falling in this pitfall.
What is Wash Trading?
Wash trade is a form of a fictitious trade which is also referred to as round trip trading. It is an unethical practice where investors buy and sell the same crypto asset at the same time in order to manipulate the market.
The practice can unnaturally increase the trading volume in order to make the crypto asset appear as though it is more desirable than it actually is. Further, wash trading can also be used by these malicious traders and brokers to manipulate the crypto asset prices.
Wash trading is sometimes executed by a trader and a broker who are colluding with each other. Further, sometimes wash trades are executed by investors acting as both the buyer and the seller of the security
What is High-Frequency Trading?
As the name suggests, HFT is all about speed. This technique uses various algorithms to analyze the smallest price changes and discrepancies between the same asset prices on multiple exchanges. Typically, the HFT platforms and systems can automatically open and close several positions per second and aim for short-term goals that would otherwise go unnoticed by our naked eye.
Traditionally, this technique applies to foreign exchange, stock, and other markets. However, over time, high-frequency trading has gained traction in the crypto space, mainly because of the multiple trades per second, offering a slew of benefits.
HFT provides a strong potential for Wash Trading as the same is automated and high speed. It will be very difficult to trace wash trading done through HFT.
In 2012, then-Commissioner of the Commodity Futures Trading Commission, Bart Chilton, announced his intention to investigate the high-frequency trading industry for violations of wash trading laws, given how easy it would be for firms with this technology to enact wash trading under the radar.
In 2013, the Securities and Exchange Commission (SEC) charged Wedbush Securities for failing “to maintain direct and exclusive control over settings in trading platforms used by its customers,” a failure that enabled some of its high-frequency traders to engage in wash trades and other prohibited and manipulative behaviour.
According to research by the Blockchain Transparency Institute, approximately 80% of the top 25 trading pairs for bitcoin at cryptocurrency exchanges in 2018 were wash traded.
How to find Wash-Free Data?
With an intent to safeguard investors from wash trade, Blockchain Transparency Institute (BTI) (bti.live) is an organization that is dedicated to the identification of fake volume trades done on various crypto exchanges and other crypto platforms that provide rankings to these exchanges. As an example, you may refer to the 2020 Market Data Integrity Report issued by BTI recently.
At last, you can understand the real volume of an exchange or an asset only with cautious research and open eyes.
Some of the exchanges which are regarded as clear winner without wash trading are: