Bitcoin and numerous other cryptocurrencies dropped recently, with BTC below $7,000 USD on June 10. This follows the announcement of a CFTC probe into price manipulation on the digital asset exchanges on June 8. In this data probe, the CFTC (Commodity Futures Trading Commission) is investigating whether there has been collusion among traders to manipulate Bitcoin prices, in collaboration with the US Justice Department.
Due to a dispute over access to bitcoin trading data tied to futures pricing, the regulators have escalated their probe into price manipulation. According to a report in the Wall Street Journal, the regulators have demanded trading data from several Bitcoin exchanges. The expressed purpose of this investigation is a probe into whether the markets are being manipulated.
CME Group launched its Bitcoin futures exchange six months ago, enabling accredited investors to trade in this new form of derivatives based on the value of Bitcoin across four exchanges, including Bitstamp, Coinbase, itBit and Kraken. The CFTC is investigating whether manipulation on one or all of these exchanges might affect the derived price of the Bitcoin futures.
At the time that CME Group created its new product, it requested that each of the four exchanges provide price data. Several of the companies originally denied access to their data, citing its intrusive nature. Eventually, agreements were made where CME limited its requests to a few hours of activity, rather than a full day’s trading data, and a limitation on total market participants.
The CFTC originally approved the Bitcoin futures project under the assumption that it was risky but worthwhile. However, they decided to take action and subpoenaed the exchanges for their trading data after the pushback on sharing data with CME. There were no agreements in place to compel the exchanges to share their trading data with the CME, meaning that the exchanges should have been under no obligation to open up their books to another private company, especially since CME is a direct competitor.
Had agreements been in place, the exchanges would have been required to provide data to CME which would have included the time of trades, unfilled or cancelled orders, order size and trader identities. Regulators didn’t recognize the exchanges’ right to privacy, nor the rights of their customers’ privacy, and this action raises serious questions regarding a company’s rights to privacy regarding its own data, given that this action was taken because of the product sold by CME, not what was sold by the exchanges.
The final price of each Bitcoin contract is determined on the last Friday of the month that each contract expires. It’s calculated as an average of the price across the four exchanges, during a one-hour window. Given the size of the market, it’s definitely possible to manipulate price data during this period. While the CFTC does appear to have a legitimate reason for the probe, the bottom line is that CME should have made agreements with the exchanges that it utilized for its calculations. This was a failure on the part of CME, not the exchanges, and yet the exchanges are being punished by being forced to open up their books. Granted, not every exchange is under the jurisdiction of the CFTC, as Bitstamp is registered in Luxembourg and Slovenia.