Market Structure

Suspicious behavior on Kraken exemplifies the gap between crypto and legacy market structure

Quick Take

  • Amidst new leadership hires, The Block received reports of less than desirable institutional support at Kraken
  • The gap between legacy equity market structure and crypto continues to be a roadblock for institutional investors that require specific fiduciary benchmarks to be met

While analysis of wash trading and other manipulative practices across crypto exchanges continues to surface, even the more respected exchanges can flash signs of shortcomings in the crypto market. In terms of institutional coverage, the gap between legacy equity market structure and crypto continues to be a roadblock for institutional investors that require specific fiduciary benchmarks to be met.


Suspected wash trading rife at major exchanges, per study

Read More
Fresh off its $100 million fundraise, Kraken the San Francisco-based cryptocurrency exchange last exploring a raise at a $4 billion valuation, recently brought on five new members to its leadership team hoping to address these structural gaps*. Some of the new hires have decades of experience managing trading desks for firms including JPMorgan, Citibank, Credit Suisse, and running execution strategies at CME Group.

The leadership additions come amidst reports received by The Block on background of an institutional trader who believes Kraken volumes aren’t exactly where they report they are. Considering the exchange’s reputation and supposed multi-billion dollar valuation, the trader also felt they received less than acceptable service from the exchange, especially considering its push to service and on-board more sophisticated institutional accounts.

In one example, a trader showed The Block a situation where a known institutional account got stopped out, or executed at a market price well below its set stop order on Ether, the second most liquid asset on Kraken. Total ETH volumes were roughly 10K ETH volume (or $1 million USD) and the stop order was less than two basis points worth of the volume on the candle down.

At first glance, slippage and execution below stop losses is an unfortunate natural occurrence. However, it’s rare to see that type of volume push a price that far on only one exchange, as the trader had multiple stop orders at other exchanges at various higher increments (up to 2.5% above Kraken’s executed stop) that were never hit, according to the investor.

~10K worth of ETH was enough to push the price down 4% vs. a quoted $12m worth of ETH volume during that 24 hour period, an indication that volume wasn’t exactly at the levels Kraken was reporting, according to the trader

In a later conversation with The Block, the trader said they believe Kraken’s liquidity is clearly not what it’s actually reporting, and that the exchange could be allowing algos to “stop hunt” by providing data on where they sit in the order book.

“We are not talking about poor execution on an illiquid token. We are talking about the most liquid token on the planet and execution on the platform that is nowhere near where other exchanges are executing at the same time. That shows complete lack of liquidity and market makers, and a complete disregard for real investors who believe Kraken is offering best execution,” they said.

The trader also said they believed a trade that size pushing the price more than 3% below the market price on other exchanges is emblematic of algos purposefully trying to take out stops on weaker than advertised liquidity. They later added, “These bots won’t even be around in two years because the inefficiencies they are exploiting won’t be there when this market matures. When they’re gone and you’ve alienated all of your real clients, what will [the] business model be?”

Kraken’s response? Blame normal crypto volatility.

In a support ticket received by The Block, a Kraken customer support representative responded to the account in question, “The more time you spend looking at different charts, the more spikes you’ll see, and I’m sure that you’ll come to find that this does happen once in a while no matter where you trade. For me it’s part of the fun.” 

The representative then compared similarities to other large moves found on OKCoin, CEX.IO, and Bitstamp, some of which ironically have come under fire after recent analysis highlighted rampant wash trading practices.

“Traders can benefit from volatility. I’m sure there were some take profit orders that got filled due to those large spikes, which made some traders a lot of money. It really depends on which side of the market you are on. If I made money due to a spike I would definitely find that to be fun. If I lost some money then that is ok, that is the risk we all take as traders in a volatile marketplace,” the representative concluded.

According to the support ticket, Kraken is exploring Stop Loss Limit orders which could have helped prevent the trade from being stopped out.

In fairness to Kraken, this situation is a far cry from the outright fraud and market manipulation occurring across a majority of illegal unregulated exchanges. The company also firmly asserts that claims of the exchange selling stop data are false, and this type of volume push is not rare at all.

It does however highlight market structure complications still very present in crypto, especially with institutional accounts that have come to expect a certain level of service from legacy asset brokerage functions.

Jeff Dorman, a Wall Street trading vet looking to move the needle towards institutionalizing crypto as a portfolio manager at Arca Funds, told The Block some of the bigger roadblocks he sees with institutional coverage in crypto are the lack of trusted institutional service providers and phantom liquidity across exchanges.

“If I start my own fund in equities, and I plop down on Bloomberg, there are trusted institutions out there [for execution, prime, etc.] there is a level of trust inherent. Most crypto exchanges have only been around for a few years tops. Part of my job as a fiduciary to investors is to do due diligence on OTC dealers, trading software, exchange execution, risk and portfolio tools, because it’s not a given especially in crypto that these businesses can offer adequate services,” Dorman said.

“I’m not naive in what [Arca] is getting into for crypto institutional coverage, in fact we’re trying to move the needle on institutionalizing crypto ourselves. But as fiduciaries of investor capital there are procedures we have to follow from a compliance and regulatory standpoint. From our experience some exchanges and service providers are more interested in following those rules than others. Ultimately that level of trust you build with your sell-side counter-parties just isn’t there. That’s largely due to background [tech vs Wall Street] and lack of broker dealer OTC desks.”

Dorman noted that Arca tries to do as much volume OTC as it can, reiterating comments The Block received from other institutional traders that it’s easy to spot the exchanges with market makers vs. market takers. “It doesn’t take much to push these token pairs around across exchanges. Multiple times when you try to execute on an order book that shows depth, the orders either get pulled or the price moves on you. It’s certainly a problem,” said Dorman.
Indeed, many of these institutional players are counting the days until the market matures enough to facilitate greater entry into the space.

Larry Tabb, founder of capital markets research and consulting firm TABB Group, told The Block “Crypto market structure stuff is so hard. There are so many exchanges, how secure are they? Regulatory arbitrage present across jurisdictions. How efficient is settlement, execution and slippage costs, etc.? How do we manage market manipulation? There are a lot of questions left to be answered for fiduciaries managing real capital here.”



This story was updated to include Kraken’s position that the unnamed trader’s assumptions and conclusions are incorrect.

The Block has removed the words “worth of” and “triggered” in reference to the 2 basis points, for clarity.  

*Kraken asserts they never made the statement of hiring five new members to its leadership team hoping to address structural gaps.