The insider trading cartel that abuse DEXs

Solidus labs recently published a detailed crypto market manipulation report and the findings are alarming. You can find the complete report here (you need to have a business email ID to access it). Here is a summary of its main findings:

Solidus’ crypto market integrity platform HALO revealed evidence of insider trading via DEXs (decentralized exchanges) connected to 56% of all ERC-20 token listing announcements on a number of major crypto exchanges since January 2021.1 Altogether, HALO falgged around 100 suspected insiders that have engaged in over 400 insider trading events!! Who are these entitites?? Are they some sort of a shady cartel of high net-worth crypto investors??

The table below summarizes Solidus’ analysis of the insider trading events surrounding major exchanges’ ERC-20 token listing announcements:

DEX-Based Crypto Insider - an entity that uses a cryptocurrency wallet (or group of connected wallets) to execute on-chain purchases of a token just before its listing is announced by a centralized exchange – and on-chain sales of that same token shortly after that listing announcement

In total, out of the 234 ERC-20 token listing announcements studied, a whopping 56% were affected by insider trades with around 411 distinct insider trades! Furthermore, serial insider trading makes up the majority of this suspicious activity. They define serial insider as a cryptocurrency wallet (or group of connected wallets) that has executed suspicious trades before and/or after two or more token listings.

The predominant scheme of insider trading seems to be comprise of buying the token using a decentralized exchange days or hours before its listing is announced by a centralized exchange/crypto platform. The entity then sells the token using a DEX shortly after.

One serial insider traded ahead of 14 listings using DEXs – and as many as 22 more using CEXs!! This guy used nine separate but connected Ethereum addresses to frontrun 14 token listing announcements on one exchange throughout 2021. These addresses – each of which have direct or indirect exposure to a single consolidation address – spent a combined $2.7 million buying tokens before their listings were announced, only to flip them for a profit of over $300,000 after.

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Solidus has also identified 54 additional wallets that have traded ahead of just one ERC-20 token listing announcement – potentially indicative of insider trading by token issuers, market makers, or investment firms.

Their findings suggest that the pseudonymity of DEX trading, along with the fact that crypto assets are often listed on DEXs and other CEXs well before they are listed on major exchanges, increases the appeal – and therefore frequency – of insider trading in digital assets relative to stock markets.