OKex: The “real 10” cryptocurrency exchanges also have wash trading problems
As in traditional markets, a lot of wash trading comes from the traders themselves rather than exchanges.
In a brief word to Crypto Briefing, Lennex Lai, OKex director of financial markets, conceded that OKex has a wash trading problem.
"We would acknowledge that," he reportedly said.
A great many reports have said the same, but the cryptocurrency wash trading problem may have reached a new level of prominence with the Bitwise report which alleged that 95% of all apparent Bitcoin trading volume is fake.
While the general perception is that exchanges themselves drive wash trading to artificially boost listing fees and draw more customers, Lai denied that OKex itself was doing the wash trading, and gave a more nuanced perspective instead.
According to Lai, tiered fee structures of the kind used by OKex can make it economical for users to wash trade against themselves, even if they have to pay to do so, because it lets them access lower trading fees to save money overall.
Without KYC measures, Lai said, this is very difficult to prevent.
Wash trading incentives by the numbers
One effort to quickly separate the real from fake volume exchanges is to simply rule out all exchanges which allow users to trade without fees. CoinMarketCap has an option to do this. You can see the top exchanges by self-reported volume here, and the top exchanges by self-reported volume minus the zero-fee exchanges here.
As you can see, this method eliminates quite a few dubious exchanges, which strongly suggests that an absence of trading fees is a potential risk factor for wash trading on some exchanges.
But the same weeding technique also leaves many exchanges which have been found to show signs of wash trading in various reports, including OKex. This can be explained by Lai's suggestion that fees themselves can also drive wash trading.
The idea is that traders can get lower fees with higher trade volumes so they wash trade against themselves, much to the chagrin of the exchanges, to get those lower fees.
A new question, then, might be why other exchanges with similar tiered fee structures are seemingly immune to these problems. Binance and Bitfinex, for example, are both widely recognised as clean exchanges with 100% genuine volume, but they also have similar tiered fee structures as OKex, and very similar risk profiles in other ways.
Here are OKex's and Binance's fees side by side, just as food for thought. Note that the Binance fee tiers also require increasing amounts of BNB holdings for higher tiers.
Binance (with enough BNB holdings)
|Vol. required (30 day BTC)||Maker fee||Taker fee||Vol. required (30 day BTC)||Maker fee||Taker fee|
|< 100||0.100%||0.150%||< 100 BTC||0.1000%||0.1000%|
|≥ 100||0.090%||0.140%||≥ 100 BTC||0.0900%||0.1000%|
|≥ 500||0.080%||0.130%||≥ 500 BTC||0.0800%||0.1000%|
|≥ 1,000||0.070%||0.120%||≥ 4,500 BTC||0.0700%||0.0900%|
|≥ 5,000||0.060%||0.100%||≥ 10,000 BTC||0.0600%||0.0800%|
|≥ 10,000||0.050%||0.080%||≥ 20,000 BTC||0.0500%||0.0700%|
|≥ 20,000||0.030%||0.060%||≥ 40,000 BTC||0.0400%||0.0600%|
|≥ 50,000||0.020%||0.050%||≥ 80,000 BTC||0.0300%||0.0500%|
|-||-||-||≥ 150,000 BTC||0.0200%||0.0400%|
You can also find Bitfinex's fee structure here. Note that maker fees drop to 0% with as (comparatively) little as US$7.5 million traded in a 30-day period.
Without actually doing the maths, at a glance it looks like high volume traders on many exchanges could make a net profit by wash trading against themselves to maintain the best fee tier each month, and that big traders could prefer wash trading to quickly hit their volume targets recently rather than slowly doing it all organically.
It looks like this incentive exists across almost all of the most reputedly legitimate top exchanges, which raises questions around what exchanges are doing to prevent this.
"It takes time to build volume, and one of the easiest ways, especially for some of the Chinese traders, is to wash trade some of the more illiquid pairs," Wei reportedly explained at an institutional meetup.
Does wash trading also occur on the "real 10" exchanges?
Tiered trading fees are ubiquitous among many of the top legitimate exchanges, with 9 of the Bitwise top 10 having similar volume-based trading fee tiers.
But if this kind of fee structure drives wash trading, you've got to ask whether even the "real volume" exchanges are experiencing the same problem. According to Lai via Crypto Briefing, the answer is a hard yes.
"Even exchanges included in the new Messari "Real 10" volume index have problems," Crypto Briefing quotes Lai as saying.
Suspicions are being raised elsewhere, and in a guest article for CoinDesk Daniel Cawrey of Pactum Capital points out that the Bitwise report kind of skirted over Binance and Bitfinex, despite their prominence in the market.
Plus, Bitwise is also a sponsor of the Blockchain Transparency Institute (BTI), which has also found Binance and Bitfinex to be among the clean exchanges. But, somewhat ironically given its name, BTI didn't disclose its full methodology in recent reports.
What's the answer?
"Wash trading can easily be prevented if you require clients to do KYC," Lai said, but without that it's "like a game of cat and mouse."
Currently, OKex does not conduct any KYC for sign-ups, deposits or trading, or for withdrawals up to 0.5 BTC every 24 hours. But it's planning to change this, in part because of the customer-driven wash trading problem, Lai said. With full KYC, it will be easy to identify and permanently evict users who are wash trading with themselves.
Binance may be in a similar boat. It does not require any KYC for sign-ups or trading, and allows even more sizable withdrawals of up to 2 BTC every 24 hours without any KYC.
Based on the information from OKex, Binance may also seemingly be at high risk for client-driven wash trading. It might not be entirely coincidental that Binance's KYC-required fiat arms have just a tiny fraction of the volume of its crypto-only exchange.
But perhaps it's not a coincidence either that Binance just partnered with IdentityMind to introduce digital KYC measures.
Fake trades, real problems
A disproportionate amount of attention is paid to the figures like "95% fake volume". There are a lot of shoddy exchanges no one's ever heard of which self-report billions of dollars in trades, but their actual impact on the industry as a whole is minimal because everyone knows to simply ignore their ludicrous claims.
As one analyst said:
This is litteraly the same as if I created a new exchange processing $1 trillion volume, got it listed on CMC, and 3 months from now the WSJ was to report "99.9% of all volume found out to be made-up, wow much fake, such crimelords"
— Sylvain Ribes (@ArtPlaie) March 22, 2019
The real hazard is when exchanges which people actually use, which are believed to have entirely legitimate volume, and which may even believe themselves to have entirely legitimate volumes, get undermined by an unknown amount of wash trading.
This can have surprisingly far-reaching impacts. There's not yet a lot of evidence on how wash trading is actually impacting the cryptocurrency markets, but there's no shortage of research from traditional markets.
In one study of 40 successfully identified and prosecuted market manipulation incidents on the Hong Kong Stock Exchange, researchers found that wash trading was a common element, and that it was detrimental to the markets as a whole, in that it artificially increased bid-ask spreads and volatility.
Other studies have gone further with findings that wash trading and other manipulation on the stock markets is unfairly burning a lot of people and discouraging retail investor participation due to (arguably very accurate) perceptions of the market being stacked against them. Unfortunately, the problems of stock market wash trading and market manipulation are currently getting worse, not better.
The problem is not that some exchanges no one's heard of are laughably self-reporting a bazillion dollars in trades every day. It's that the big exchanges everyone has heard of, and that people really do use for both trading and data, may be experiencing an unknown amount of wash trading, which may be having much more tangible and insidious market impacts.
OKex's willingness to approach the problem openly and head-on is a healthy sign.
Disclosure: The author holds ETH at the time of writing.