Crypto trading bots threaten the market integrity - research

Trading bots distort trading volumes and foster price manipulations on decentralized cryptocurrency exchanges, according to the recent report published by researchers at Cornell Tech University.

The researchers found out that arbitrage bots take advantage of ordinary cryptocurrency traders on decentralized exchanges also known as DEXes as the companies that deploy and manage them pay higher trading fees and get access to priority ordering. It allows them to employ front running practices, in which traders can see orders from others and be the first to place their own.

While the aggregate trading volumes on DEXes are still small, the segment is growing quickly with many centralized exchanges like Binance creating their own decentralized versions. 

What’s more, the researches believe that the same practices may be applicable at the centralized crypto exchanges.

“We have no idea what the extent of the malfeasance is on centralized exchanges. If we extrapolate from what we’ve seen on DEXes, it could well be on the order of billions of dollars,” Ari Juels, a professor at Cornell Tech, said.

The authors of the paper warn that such trading bots use  market-exploiting techniques that are  common on Wall Street: front running, aggressive latency optimization, and so one. As a result the flaws in DEX design combined with manipulative tactics may threaten underlying blockchain security.