Crypto.com has been accused of having a potential conflict of interest due to its internal trading team operating as a market maker on its platform, according to a report by the Financial Times. Market makers provide liquidity, which allows users to buy and sell quickly at prevailing market prices, reducing the risk of price fluctuations and enabling efficient trading. However, this raises concerns as exchanges aim to protect their customers’ interests while trading teams aim to earn a profit. If an exchange has its own market maker and traders, it may prioritize its interests over those of other parties.
Conflict of Interest and Manipulation
Exchanges with their own market makers and traders may execute user orders at less favorable prices than their trading desk. Additionally, exchanges have access to market data, including order flow and trading volumes, which could be used to give an unfair advantage over other traders. With control over the trading platform and their trading desk, exchanges may manipulate the market, including artificially inflating trading volumes and creating misleading market trends.
Unnamed sources cited by the Financial Times alleged that Crypto.com’s trading desk primarily aims to generate money, not to facilitate an exchange, and that it had asked employees to deny the existence of an internal trading team and in-house market maker operations. However, Crypto.com defended its position by saying in-house market making is “not a controversial practice” and that its internal market maker is treated “exactly the same” as third-party market makers on the exchange.
Crypto.com stated that its traders hedge their positions on different platforms to ensure the company remains “risk neutral” and that it does not rely on its trading desk as a significant source of revenue, which mostly comes from its retail trading app. The company also denied having asked its staff to lie to other market participants.
The Securities and Exchange Commission chair Gary Gensler criticized crypto exchanges earlier this month for often commingling functions, stating that “In traditional finance, we don’t see the New York Stock Exchange also operating a hedge fund, making markets.” Due to the hostile regulatory landscape in the United States, Crypto.com is set to close its institutional exchange in the country this week.
Crypto.com’s in-house market making has raised concerns about a potential conflict of interest that could prioritize its interests over those of other parties. Exchanges that have their own market makers and traders may execute user orders at less favorable prices than their trading desk, manipulate the market, and have an unfair advantage over other traders. While Crypto.com defended its position, the Securities and Exchange Commission’s criticism of crypto exchanges highlights the need for better regulation in the industry.