Fake It Till You Make It: When Bitfinex themselves used to spoof their entire orderbook.

In this post I’m going to explain how Bitfinex themselves ran arbitrage with other exchanges, and displayed orders from other exchanges as their own, as if it was their own order book.

This is not ‘spoofing’ in the traditional sense of my previous post, where a trader places an order he has no intent on executing.

Instead, this ‘spoofing’ is displaying orders on your exchange which in reality are foreign orders to buy or sell Bitcoin, in an attempt to claim that your exchange has more liquidity than your competition.

Essentially, the exchange is being less than truthful about the real depth of their order books.


The ‘Chief Strategy Officer’ of Bitfinex, Phil Potter runs a Bitcoin arbitrage hedge fund. So it’s very likely that this was his doing.

Source

This ‘bitcoin arbitrage hedge fund’, performed arbitrage between Bitfinex, and Bitstamp. (and this is a conflict of interest, running a bitcoin arbitrage hedge fund while also working for one of the exchanges)

Bitfinex Chief Financial Officer, Giancarlo Devasini

So, it’s now well established that this is a FACT: Bitfinex imported order books from other exchanges. If you still don’t believe me, this website is for you.

The goal of this ‘program’ was to make their exchange look like it was larger than it really was and they had the ‘best’ liquidity.

The reality is a significant amount of orders displayed to traders on their exchange, were in fact… Bitstamp orders. Not Bitfinex.

So? What’s wrong with that?

Well, it creates a large problem. Chances are the imported orders on their books, were not actual orders for real on their exchange made by private traders.

Instead, they were orders from the exchange itself.

Someone in theory could do this privately, but in order to do this they would need to keep the amount of Bitcoins they’d want for the ASK side, and the amount of US Dollars for the bid side, and then ‘copy’ the orders from Bitstamp plus any premiums they’d want.

However, if you happen to work for the exchange, you can write a bot in the trade engine yourself, and display those orders without actually having the money on the exchange, or even Bitcoins for that matter.

I believe that this is more likely.

Source (Archive)

In ordinary trading, someone ‘triggers’ an order that is in reality on Bitstamp, and Bitfinex simply executes that trade with their bot on Bitstamp and they can deliver the USD/BTC.

That will work during normal trading and when the price is stable… but this is Bitcoin.

Originally this was discovered by accident by a few traders, they noticed that when Bitstamp would go down, the orderbooks on Bitfinex shrunk dramatically, and then when Bitstamp returned, so did their orders.

Admittedly, it’s not such a terrible idea at first glance.

The problem.

Imagine the following order books on Bitstamp, and Bitfinex. These are all bids to buy bitcoin. Imagine that the current price of Bitcoin is around $750.

Someone looking to sell a lot of Bitcoin, will typically use multiple exchanges in unwinding their position.

Imagine you have 1,100 BTC. You read the order books and assume that you can get out of your position and only cause the price to drop $50. You deposit 650 BTC to Bitfinex, and then 450 BTC to Bitstamp.

You execute your market sells on both Bitstamp, and Bitfinex and you don’t care about the slippage.

  1. Bitfinex in reality only has 200 BTC for sale to $700, and they ‘imported’ the orders from Bitstamp for 450 BTC.
  2. Your sell order for 450 BTC on Bitstamp goes through.
  3. Bitfinex’s trade engine now has to match orders that no-longer exist on Bitstamp, because you sold on Bitstamp before their trade engine arbitrage bot could ‘catch up’.
  4. You sold 1,100 BTC, but in reality there was only 650 BTC in bids to $700.

So… what happens? This is what happens. Flash crashes that would look like this.

Notice how the Bitfinex price sunk way more than the rest of the market.

Figuring out Bitfinex’s so-called ‘speed bump’.

Note: this is from yet another 2014 flash crash. Source (Archive)
Source

Those damn manipulative traders!

I’d be willing to bet that the primary purpose of this “Speed Bump” was to allow the trade engine to ‘Catch up’ to the state of whatever Bitstamps order book was in. The speed bump simply prevents you from selling.

There is no speed bump on the buy side. That’s why ‘manipulative traders’ can pump up the price of Bitcoin by $500 in a few hours.

What is very interesting about this post is how Josh Rossi, from Bitfinex, claims Bitfinex has an algorithm for detecting ‘manipulative’ trading.

But their trade engine will match orders against the same account, apparently wash trading between your own account, isn’t manipulative, or spoofing for that matter.

You know, the trade engine doesn’t trigger against activity that is illegal and blatantly manipulative.

The ‘manipulator’ was likely someone just selling

Rather than someone ‘manipulating’ the price as Bitfinex claims, someone likely caught their trading bot with their pants down. They assumed that the orders on Bitfinex were bonafide, and executed market sells on both exchanges.

Since Bitfinex was being less than truthful about the state of their orderbooks, the trade engine was not able to fill the now non-existent Bitstamp orders, resulted in more slippage than the seller thought would happen, which is then exacerbated by margin calls.

Does Bitfinex still do this?

The truth is, we don’t know. But I highly doubt they are not continuing to do arbitrage themselves. They had to come up with something to bring down the premiums from their banking crisis.

It could explain why the Bitfinex premium has gone down, as they themselves in theory can deposit and withdraw from their own exchange, while ordinary traders (or what Whalepool calls “Plebs”), can’t.

Conclusion

When you think about the fact that the exchange themselves decided to ‘import’ foreign order books to try and get an edge, it makes you wonder if they’d also engage in wash trading to also get an edge.

Their CFO said that they don’t, but he admits they thought about doing it. To me, the primary decision maker at Bitfinex admitting he thought about committing fraud, is alarming.

The exchange in my opinion has a well documented history of being less than truthful, most recently claiming they were not associated with Tether, when they were.

The exchange also stated that they don’t have people spoofing on their exchange, when they were.

And of course that one time Bitfinex claimed they were going to get a financial audit by Ledger Labs and continued that lie for eight months until they finally came clean about the Ledger Labs financial audit.

And of course that one time Bitfinex claimed they were going to get a security audit by Ledger Labs and then never produced the results of this report that they promised they would release.

… I mean I can go on all day.

And well, I’m not sure if I trust the judgement of the Chief Financial Officer of Bitfinex. “If you convert your BFX tokens to shares, our company has value!”

Uh, I don’t think it quite works like that.

If I owe someone a million dollars, and they agree to ‘forgive’ the debt in exchange for… ‘equity’ in their business…. that doesn’t give them a million dollars of ‘value’. They have the same amount of value they had before.

The more likely answer is Bitfinex suckered a bunch of people into converting into shares, in hopes that they could sucker people into buying shares in their business, you know… with all of the good news about how they ‘repaid’ all of their BFX tokens.

To his credit though, it was the quickest way to get their money back. Convert BFX tokens to shares, then sell your shares to another bagholder. Boom, you’re made whole.

Bitfinex themselves never have to ‘repay’ their token holders. Their shareholders did!

Just don’t be the last guy holding those shares.

Trade carefully.

-Bitfinex

The comic version of a Spoof
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