Taming the Crypto Wild West with Trade Surveillance

By Greg Tishelman, Director of Crypto Sales, OneMarketData

Greg Tishelman

As the crypto market has continued its volatile ride over the past year, most market participants would agree that regulators needed to step in and tame what has been – and in many cases still is – the Wild West of crypto.

Regulation is coming and that is not a bad thing; in fact, it’s welcome. The whole point behind regulation is to understand and see the flow of funds, both who is sending them and who is receiving them. But when it comes to trading, monitoring trading activity is not only crucial – it’s mandatory. Crypto exchanges, institutions and firms must be fully compliant, regulatory friendly – and most importantly – fully transparent. Now that crypto has hit the mainstream, the market needs to adopt the same factors and security practices that have been in place in the traditional equities space for years while simultaneously attempting to harness the innovation behind blockchain technology.

Tailoring Trade Surveillance for Crypto

As more crypto coins/tokens are created and more crypto investment vehicles appear, it is vital that exchanges and institutions have the proper trade surveillance, compliance and risk management systems in place to prove to regulators they are 100% complaint and operating within the appropriate scope. An institution’s exact requirements will be dictated by its nature and size; the more sophisticated the firm is, the more their surveillance and technology solutions must be fit for purpose.

While many firms may have trade surveillance solutions in place for equities trading, they will need to tailor their trade surveillance for crypto assets. Traditional markets do not trade 24/7 – whereas crypto assets never stop trading. A firm must be able to monitor and differentiate between traditional and crypto transactions, whether they are on-chain or off-chain. Firms must also consider how widely available certain digital assets are and which exchanges freely trade them. In addition to these challenges, firms must prepare for new issues that may appear in the short-term future. From smart contract exploitation to oracle abuse, every firm must have tools in place to detect 24/7 manipulation.

The risks that a financial institution will find itself under a regulator’s magnifying glass are enormous if it doesn’t employ the appropriate risk and surveillance measures. Today’s bad actors continue to evolve their attack vectors to take advantage of every loophole available to them. From layering and spoofing to quote stuffing, fixed manipulation, insider trading and wash trading, detecting market abuse is a constant game of cat and mouse between institutions, regulators and bad actors. The proper crypto trade surveillance can help firms protect themselves from reputational damage and identify market manipulation, fraud and money laundering.

Optimizing for crypto data

Any firm trading crypto today needs full access to crypto data history so that it can easily investigate irregular participant behavior down to the nanosecond. Institutions must be able to capture all the crypto data flowing through the order book while layering trade surveillance on top to generate alerts when specific criteria is breached and receive a clear map to the moment when executions occurred.

The ideal crypto trade surveillance system will allow a firm to rebuild the market and step back through time to either replay the specific market activity across a specific alert, or look back across the entire day, then zoom down to a small sub-second time window. It must also be able to address the unique differences in order sizes and prices found with cryptocurrencies. With the right crypto data, traders can also benefit from in-depth analytics to rebuild crypto order books, join trades to prevailing market prices, calculate performance metrics and generate trading signals.

Trading insights and transparency light the way for digital assets

Complex trading requires trading analytics of the full market, not just the top of the book. As the crypto markets continue to develop and introduce new complexity, institutions will need solutions that can provide analytics to rebuild crypto order books, join trades to prevailing market prices, calculate performance metrics and generate trading signals. And with this new complexity will come new oversight as regulators work to close existing loopholes and ward off market abuse.

Crypto as a digital asset class will only reach its full potential when both markets and exchanges have implemented the same infrastructure standards that exist for traditional asset classes. The potential benefits of crypto trading are vast but so are the risks – whether it be business, existential, reputational or regulatory risk. Institutions will only be able to reap the full benefits of crypto if they ensure they have the right trade surveillance solutions in place to focus on security, transparency and compliance.