An Anatomy of A Cheat

Jumping Ahead of Market Orders

May 8, 2019

Trading is like growing up in the toughest neighborhood with burglars and drug dealers, and hookers on every street corner. And all the while someone is getting murdered.

You're small, and you're scared. Everyone is bigger than you and bullying you every freaking day. Yet you must toughen up, or die.

The only good thing going for you is that you were born tough; you learn fast, and, yes, you're scared, but not afraid (of anything or anyone).

"Now, Let's Go Get the Sons of Bitches."

All jokes aside, this is a serious post about trading lessons. In our Technical Whitepaper, we detailed twenty-nine ways the other traders, your brokers, and exchanges use to cheat you. "Jumping ahead of market orders" is one of the ways people (brokers, market makers, and cryptocurrency exchanges) you are supposed to trust rob you blind.

"Our Research Shows These Are Reputable (Cryptocurrency) Exchanges."

Oh really?

We know some exchanges are better than others. All the time you hear exchange heists, or how the brokers and exchanges (the financial market industry as a whole) cheat customers, but a few, especially the ones based in the US, appear to be much more 'reputable.'

There are no broker-dealers in the cryptocurrency trading industry. Only (mostly) unregulated, unregistered trading platforms calling themselves "exchanges" and are loosely accepted by the general public as such. For simplification, I use the term "exchanges" in this post.

Let's test out the "reputable" ones.

The Setup

The Exchange

One of the biggest US-based cryptocurrency exchanges in the world.

The Objective of the Tests

Jumping Ahead of Market Orders

Method of Testing

Using exchange-supported Stop Order type

Size of Trades

Over $15,000 each. Too small will not be effective but not big enough to suffer heavy losses.

The First Test Order

The Market

The BTC price was hovering around $5,400 on the exchange, a stop-loss order around $5,399.80 seems to be reasonable on our trading system. (The white horizontal line above.)

Order Type

A Stop Loss sell order, more commonly known as a stop order, is a Sell order when the market goes BELOW the current price set by the trader. If the market keeps going higher, nothing will happen to the stop order. Once the market goes down and the set price is triggered, however, the broker 'converts' the order to a Market order and execute at the BEST AVAILABLE price for the customer, at least in theory.

Test Duration

Between April 22, 2019, to April 25, 2019.

What Happened Subsequently?

The order I entered was one of the bigger sell orders on the Level II order book, not the biggest, but big enough to get people's attention.

Almost immediately, the market started to move down as several other big sell orders appeared on the order book. They flashed on, but all quickly disappeared. The market was sufficiently spoofed while I was watching. It started to go down.

This was well anticipated. In a thinly traded stock market, the Market Makers can see your order and sometimes are motivated enough to drive the price down to 'take out the stop orders.' So I expected the price to continue to fall and I might get filled at or a little below my stop price of $5,399.8 to be around $5,399.40-5,399.60.

I got it filled at $5,392.10.

A little too low, but not too bad. Someone took about $7 away from each of my Bitcoin. Again, not too bad.

The Second Test Order

Why did I need to do a second test order?

Because my first order did not get filled at the BEST AVAILABLE price and I did not complain, as most traders would. They simply don't know what a fairer price was. I, however, was watching the market at that time, tick by tick.

Now I was a 'marked' man, just as Bran Stark was marked by the Night King." Anything I do from that point on would have been on their "primary sucker' list.

The next day, the market was going down, but not seriously. I decided to test the exchange again.

A Stop sell order entered at $5,359.60, indicated by the white horizontal line above.

After I entered a similar sized, slightly bigger order, someone there must have been laughing: "F**king stupid sucker is coming again!"

What Happened Subsequently?

A Quiet Day

The next day, April 23, 2019, is not eventful. The BTC market is relatively quiet and trending slightly lower all day.

I went to bed with a feeling, though, that the market would go down later and I'd be 'taken out.'

The Long Tail

The next morning, I woke up around 5 am and saw this:

Oh, sh*t! I knew instantly that WAS me! My order got screwed.

Even though it was not entirely unexpected, but it still felt like sh*t knowing someone just robbed you (for over $800 per Bitcoin).

And now I will forever know I was THE sucker at the bottom of that long tail whenever I see the BTC April 2019 chart.

Clearly, someone had the full knowledge of my stop order.

The market went down when I was asleep. It went below my stop price of $5,359.60. I should have been okay.

But giving me the $4,500 price when the real market was around probably $5,350 was a highway robbery.

I logged into my account, and sure it was. I got f**cked.

Chatting with the Customer Service

The exchange had a "Chat with us" window at the bottom of the Support page. (I didn't save the conversation.)

First, I was given the standard lesson. It goes like this:

CS: "A stop order became a Market order when your price was hit."

Me: "What were the exact prices when my order was filled?"

Realizing I knew the order must be filled in much smaller chunks, not just a nice $4,500 round price for all the amount, in real life trading, he said: "Sir, I can't answer that question right now. I can convert this chat into a Support Ticket, and my team will get back to you."

The Email Support

The first response from them:

Basically, the order status was Closed, and so was my case.

I pressed for more information.

"What Really Happened?"

Investors Need More Information

It has been over 15 days. They still had not given me a reason as to why and how I was filled at $4500.00 when the market was around $5350. The stop was meant to be triggered at $5359.60. They would tell me that they could not find out the price structure back at that moment. Someone had anticipated a contest from the trader (me) and the order Open and Close times were already tempered (I didn't get up at 4 am to enter the order). We 'knew' why, and can guess even how, they did it. But with current exchange data-reporting resources, we have no evidence. They knew that, and that's why they have been able to get away with this kind of practice repeatedly.

IOB PoET protocol will record all orders that were ever entered and executed for full playback. It can be used shortly to combat such dishonest cheating.

The Danger of Market Orders

A Market order, in my case, Stop-turned-Market order, by definition and industry requirement, should be given the "Best Available Price." So legally, it is literally any price.

Instead of giving the customer the best available price, they have been getting away with the worst possible price because there has been no way to define or to measure what a Best Available Price is.

What happened to my second test order MAY not be illegal, but it was not ethical. It would unlikely happen on NYSE or NASDAQ these days. But I have seen it happened repeated in China between 2013 to 2014.  

Cryptocurrency exchanges are not regulated. Traders must be extra careful.

It was most likely an exchange employee had me "marked" or, like the brokerage Robinhood, they had sold their customers' orders, including mine, to other program traders.

The traders pay to front-run my orders. For them and the exchange, it is a win-win at the expense of the customers.

Advice Based on the Findings

Do not use any type of Market orders. According to laws and regulations, the exchanges should give you the best available price. But in reality, they will provide you with the worst possible price that they can get away with.

Always trade with a stop order, but never send it to the exchange in advance.

Using IOBot Trading System to Better Manage Your Trading

Our trading system, once released to the public, will monitor the market and hold the automatically calculated or manually set Stop orders in the trading system. It will only send the Stop order in the form of a Limit order to the exchange to protect the trader.

If the price is not filled in 2 seconds (or any other preset parameters), it will cancel and modify the order and re-send according to the strategies first employed in opening the trade.

Until then, happy trading!