Without trying to defend Coinbase in particular, isn't the fact that this was caught and punished evidence of the system working as intended? Like, what you would not want to see is a "regulated" market where the regulators never find anything bad going on.
I didn’t say anything about other regulated contexts? The regulations and enforcement agency exists because this was happening long before cryptocurrency.
Cryptocurrency is just uniquely positioned to support techniques like wash trading because it’s much easier to create multiple wallets and transfer funds around in ways that obscure the origin.
“Everyone else is doing it” isn’t an excuse.
Debatable, as most criminal activity in our society carries with it something more deterring than simply a fine. Having to write a check is what happens when you get sued and lose (a civil issue).
What’s bad about that? (not concern trolling, just a noob)
If one person bought or sold a widget in the last week for $10, you might have a lot less certainty about the actual value of the widget.
With nihilism out of the way, how is million people independently trading a thing for $10 once meaningfully different than a single buyer/seller pair trading a thing for $10 a million times?
A price of an item isn't a random phenomenon - it's just a reflection of what buyer and seller believe other people would pay for that item. This belief is based mostly on knowledge of what other people actually paid for it (or a similar widget) in the past. This process is mostly convergent[1]. Prices change at the rate of information flow, and tend toward some equilibrium. The process may be quite unpredictable, but the expectations are bounded.
As a result, markets automatically price everything relative to everything else, in a way that mostly makes sense. This is a very useful property - it's a bottom-up, implicit, somewhat fair way of solving resource allocation problem in society.
Generating fake trades like this? It's injecting bad data into the market. It's poisoning the mechanism of price determination - which, to produce reasonably fair determinations, needs aggregate trades to average great many distinct buyer/seller negotiations. Amplifying a single datum with fake trades ultimately makes the market worse at efficient resource allocation, and thus less useful to society. It's pissing in the pool from which everyone drinks.
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[0] - https://en.wikipedia.org/wiki/Problem_of_induction.
[1] - Or perhaps "consilient", which is a nice word I just discovered - https://en.wikipedia.org/wiki/Consilience.
It's even more helpful than that. It shows that a million people valued widgets at $10 or more, and a million others valued them at $10 or less. So if you value it at $10, you won't be too wrong.
With some assumptions about liquidity and the depth of pocket of market makers, you can draw some further conclusions like "not many people could have valued it at $12 or more".
> Generating fake trades like this? It's injecting bad data into the market. It's poisoning the mechanism of price determination - which, to produce reasonably fair determinations, needs aggregate trades to average great many distinct buyer/seller negotiations. Amplifying a single datum with fake trades ultimately makes the market worse at efficient resource allocation...
I'm not a legal or markets scholar, so please excuse this possibly dumb question.
Why are wash trades specifically harmful, as opposed to book orders that don't self-trade?
Like, I think what Coinbase did not get in trouble for here was having a large order book that they did not intend to trade (spoofing), but they instead got in trouble for trading with themselves at prices they would have traded with any other market participant. (Seemingly, as a fluke of the way they structured their market-making apparatus as two separate bots, instead of a single bot.) Since this was on a public market, the trades inherently happened somewhere between the public bid and ask prices -- right? I don't understand how the self-trades manipulate the price information. The fakeness that comes out of this seems to be purely the metric of trading volume.
If I'm wrong, please let me know! I'd love to learn more. Thanks.
The technical term is precedent transactions. Less technically, more observations of a thing increases confidence that the thing exists.
It does not guarantee that the thing will continue to exist. But then again, nothing does. (We “know” the sun will rise tomorrow because it rose yesterday and the day before that.)
2- It could trick customers into executing larger trades than what the liquidity is capable of handling without price impact, but this is a more minor point to the above.
Is this sarcasm?
I think you're misinterpreting what you are reading.
This is not coinbase doing anything, this is an employee taking action on their own, likely not even on company time or on company property.
That said, the company is still responsible for the employees' actions, especially because it relates directly to their job.
Cryptocurrency is like the wild west of finance, but I expected at least Coinbase was playing fair. Apparently not.