How bad actors can manipulate an exchange’s crypto prices.

There are 6 steps to making a fraudulent bot

1) plug in to an order book API. 2) create 30-40 (the more the better) separate accounts. Yes, most exchanges perform KYC on all of them, but if you pay 40 separate people to open an account for you and hand you the keys, you’re golden. 3) fund each account separately. The more popular the coin, the better the odds of finding prey to feast on, but the more liquidity you need to accomplish this. Amounts will range from 100k for the shittier coins to over 10 million for larger coins. The amount will depend on the initial price resistance (numbers of buy or sell orders and their magnitude on the order book) 4) start placing a bunch of large buy orders. With each buy order, set a separate sell order that will match the price of the buy orders. Your goal is to break through the initial sell wall resistance and saturate it with fake sell orders of similar (but smaller) magnitude at a chosen price with non-steep sell walls in between (if you go long, or via versa if you go short).

Because the Order book is public, it’s easy to determine on a rapid basis when low resistance walls form.

5) when you get your prices to reach the matching sell orders, the buying accounts take Profit, while the selling accounts theoretically “lose”… but they in fact transfer their money to the buying accounts through the order execution. The higher the amount of saturation at a chosen price level, and the less likely you are to lose funds (which may go to other traders). Having matching order quantities increases the likelihood of a market maker setting your buying account with a corresponding selling account.

6) rebalance / shuffle accounts so that money keeps flowing internally, while creating the impression of high buy or sell volume.

A trend is formed, which helps funnel in more buyers or sellers.

Meanwhile, you hold a separate amount of an underlying asset and look to sell it at a higher price caused by the fake positive volume you generated.

What stops this from happening on regulated markets? Aside from the much larger volumes on most regulated markets (more money needed to saturate the books), the order books are often delayed or not made public. Mainly certified financial institutions have access to them.

This makes it hard for any outsider to determine what is the buying or selling resistance at any given price point, which dramatically increases the risk to a manipulator.

Does it stop large certified hedge funds from abusing the system? No. They have been caught in the act before.

But audits are regularly held and anyone caught in the act is generally held accountable (generally by looking at the matching of orders and timing of various order positioning from the same accounts). The SEC also has programs in place to detect such activity.

But this is not the case with many non-regulated and non-compliant exchanges, which only perform minimal or no auditing whatsoever.

By making their order books public and easily accessible via their API, they make it extremely easy to manipulate.

Edit: If anyone at an exchange reads this, please do the world a favour. Remove your order books, or at least limit their scope and accuracy. This will reduce the number of bad actors and help protect legit traders and investors.

Furthermore, make public what steps you are taking to monitor your trading activity and preventing criminals from manipulating the market.