According to an article by the Wall Street Journal, the use of trading bots for illicit activities can be one of the main causes for volatility in the cryptos market. Bad actors will employ a number of market manipulation tactics such as flooding, then immediately canceling, call orders or executing simultaneous trades with oneself to create a mirage of activity.
While left without a quantifying factor, the journal offers the experience of many hardened traders who have witnessed such activities and had to tweak their own bots to work around the hostile activity.
Stefan Qin, for example, who is a managing partner of Virgil Capital, an $80 million digital-currency hedge fund, says that engagements with “enemy bots” are a constant in his industry. He tells the paper that “We’ve had to build in error-handling functions to check for hostile and potentially illegal activities…Such is the Wild West of crypto.”
Providing a recent example, Qin describes how Virgil lost on trades due to a market harassing bot. Specialized in arbitrage trading, which takes advantage of cryptos priced differently on different exchanges, found himself one step behind a hostile bot. Performing a strategy similar to “spoofing,” as the WSJ informs, Qin states that:
“…the hostile bot would post orders to sell ether at a lower price than other sellers. That would prompt Virgil to attempt to buy ether. But before it could do so, the bot would cancel its sell orders. Virgil ended up posting buy orders that didn’t get executed, briefly boosting the price of ether on some exchanges.”
Some see bot market manipulation in a decentralized market as inevitable and rather than fight it with regulation, level the playing field with more market manipulation. Kjetil Eilertsen, for example, created a program called Quatloo Trader which he calls “the best market-manipulation tool in the world of crypto.”
“If everybody can manipulate, then nobody is manipulating…You can’t ban anything from people who are dedicated to doing something,” said Eilertsen
One of the tactics that can be employed through Quatloo Trader is called “ping-pong” and it enables users to simultaneously execute buy and sell orders to oneself. The WSJ calls this “wash trading” and informs readers that it is illegal in stocks and futures.
Coinlist’s co-founder and president Andy Bromberg disagrees that fighting bots with bots will be the solution to this problem. He states that “It hurts the market’s reputation, and it hurts individual investors,” which in effects slows the adoption of cryptocurrencies.