How Modern Exchange Robots Influence the Cryptocurrency Market

September 21, 2018

Trading robots, or algorithmic trading as it is sometimes referred to, have long ruled the stock market. The frenzy and madness once seen among trading floor crowds is part of a bygone era. We now have an electronic market and human trading makes up only a small portion of the total trading volume. Many people blame trading robots for numerous stock market crashes but is there any truth to these claims?

Trading Robots and the Stock Market

Trading bots have been very popular and widely used in traditional financial markets. However, they have also been credited as responsible for numerous market crashes, one of the most famous one was the Black Mondaycrash.

The year was 1987 when the entire financial world. It started out in Hong Kong and spread globally, becoming the largest decline in U.S. stock market history. There were many reasons leading up to the crash. Dried up liquidity, a lack of foresight into market conditions and irrational panic on the part of investors were all key factors. However, some consider that algorithmic trading was the main contributor to the crash. Still, a relatively new and untested technology at the time, trading robots were responsible for roughly 10% of the trading volume in New York Stock Exchange. In the aftermath of the event Peter Peterson, former investment banker and U.S. Secretary of Commerce, said that technology is only as good as the people behind it, suggesting that the fault wasn’t entirely with the trading robots themselves.

Trading Robots and the Crypto Market

Unlike the stock market, the crypto market had robots trading from early on. With the inception of the first crypto exchanges suddenly everyone had direct market access (DMA), something that was reserved to privileged traders. Not only were there no barriers of entry, the crypto market was also globally accessible to anyone and open 24h a day, unlike the traditional financial markets. All of these factors made the unregulated crypto market perfect for people to develop and employ trading bots, and that was exactly what happened.

Initially, robots would resort exclusively to arbitrage trading, exploiting price differences on multiple exchanges. But they have grown more sophisticated over the years and are now able to do high-frequency trading, executing multiple buy or sell orders in a question of milliseconds. This feature does not only make it impossible for humans to outbid the machines but is also responsible for many cases of market manipulation. One example of this is the reoccurring flash crashes. This is when there is a substantial and sudden price crash, only to recover in a matter of minutes. A good example of this was last year’s Ethereum flash crash, where the price of Ether fell from $319 to $0,10.

There is really no need to go to lengths in order to measure the impact of trading robots in the crypto world. Although it seems to have been ages ago it was only in 2014 when the infamous Mt Gox incident happened, one of the biggest Bitcoin crashes. The Mt Gox exchange was handling roughly 70% of all Bitcoin transactions when it announced that approximately 650,000 Bitcoins had been stolen. What some people might not know is that the incident was caused by trading robots, more precisely by Willie and Markus as they became known. The bots were responsible for market manipulation by buying enormous amounts of Bitcoin with funds they did not have, thus sending signals of healthy market growth and then selling that same Bitcoin after the price had risen. The classic pump and dump scheme.

The Negative Side

The most obvious downside as we could see is the market manipulations. However, this problem could be attributed to a lack of market regulation, the trading robots are only employed in such blatant manipulations because there are no consequences to whoever is using them. Other minor problems that robots bring is that they make the life hard for novice traders, making them unable to compete, and are also fallible and susceptible to bugs or code errors.

The Positive Side

In the midst of negativity, it is important to note that trading robots bring a lot of good things also. They make trades easier and faster while making the entire crypto space more competitive and make up the majority of trading activity, sometimes up to 80% of the trading volume in some exchanges. And although they play a huge role in bringing volatility, they also contribute vastly to making the market more liquid and efficient. So, they not only are a vital part of the industry but also contributed to the market growth seen over the years.


Like it or not, the robots are here to stay. JP Morgan is now working on the first true AI trading robot, which will learn and become better with each consequent trade. This begs some questions: will there be a place for human trading when AI arrives? And if not, how would the world look like if AIs did all the financial trading? Hopefully, we will be here to know the answer to these questions and witness the blossoming of financial technology.

The author is Andrew Zimine, CEO of Exscudo

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