Bitstamp was founded in 2011 and is now the longest-running Crypto Exchange in the world. Being a pioneer in its field it has helped shape the technical and security standards for the industry.
As Market Surveillance Officer, Colin Scanes is an expert on market microstructure across digital assets, equities, futures, options and FX. He has spent over 20 years working on the cutting edge of financial technology, most recently moving into Crypto. Bitstamp uses KRM22 Market Surveillance to monitor for and prevent market abuse across all of its trading activity. Being one of the first crypto exchanges to implement an institutional grade surveillance platform, Bitstamp demonstrated its on-going commitment to ensuring a fair and orderly market for its customers, and its desire to see the industry mature to where it is today.
We sat down with Colin to gain a deeper insight into the rapidly evolving regulatory landscape around digital assets and how Bitstamp intends to balance a compliance first culture with its aggressive plans for growth.
Thank you for talking with us today. Let’s start with a brief introduction - please tell us about how you came to join Bitstamp?
Having worked in institutional brokerage for 18 years at Bloomberg Tradebook, focused principally on Equities but also Futures, Options and FX, I found I had developed some useful skills. I knew my way around central limit order books and was pretty confident I knew what worked well when it came to execution algorithms and Pairs Trading. In seeking to get best execution for our clients we often strayed close to what would now be frowned upon by Regulators. In Pairs trading particularly, because you often try to post in the Order Book of the least liquid side of the pair and then act as a taker of the more liquid side if you get hit or lifted on your posted order, you end up sending a lot of orders and cancelling them. We were trying to trade a spread so every time the liquid market moved, we had to re price our posted order in the Book. This got us into trouble with the Exchange for the sheer number of cancel/replace messages we were sending, and we realised that although our intentions were honourable as we were just trying to trade a spread, trading behaviour can appear suspicious when viewed out of context. We throttled back the number of times our Pairs algorithm re-priced and got back in the good books of the Exchange.
This experience led me from working on the execution side of algorithms to the monitoring of their performance and onto working with regulators using software to detect manipulative trading practices on European Equities Exchanges.
An old friend of mine introduced me to crypto and then to Bitstamp where they were at the time in the process of setting up a Market Surveillance function. I was lucky enough to be considered for a role and having joined the company have had one of the most enjoyable, fascinating episodes of my career to date.
The fundamental principles of trade surveillance are essentially the same for both traditional and digital assets. Beyond that, can you explain the key differences that may arise and what gaps might need to be bridged when thinking about a crypto exchange’s surveillance strategy?
After you get through some of the easier problems to solve, like fractional order sizes and prices out to 8 decimal places not playing well in your database, some other differences start to be revealed. 24/7 Exchanges don’t have open and close periods, but the Exchange does need down time to run upgrades etc, so the impact of scheduled maintenance has to be carefully considered. Markets can run up when you are closed but everyone else is still open, so you have to manage your reopening with care, as liquidity is thinnest as your clients re-engage with your Order book.
Although Bitstamp is currently purely a Spot Exchange with no derivatives or leveraged trading, we do have to be aware of the very many ways that participants can get exposure to crypto in regulated and unregulated venues and so have reason to try to impact our price and volume. The fungible, global nature of crypto means that we have to be aware that threats exist anywhere in the world at any time.
Bitstamp is one of five Exchanges whose prices are used in multiple Indices that underlie Crypto Futures, Options, Perpetuals and Funds. We need to share information with other venues and Index providers whilst maintaining the anonymity of our Exchange participants. We often have no common regulator to whom we can funnel information who has jurisdiction to act across multiple venues, so we need to be aware and help each other protect crypto trading from abuse.
What are the biggest Regulatory challenges facing Crypto Exchanges today, and how does it affect expansion into new markets and jurisdictions?
As an asset class crypto is both varied in type whilst being accessible globally by all. The democratising of trading, giving retail clients access to orderbooks, a view of depth and advanced order types, as well as API connectivity means Regulators have to focus on a variety of actors. In the traditional world their focus is often on intermediaries such a Brokers and FCMs who themselves play a role in detecting and constraining bad actors and preventing their manipulative activity reaching the Exchange. Having everyone, retail and institutional alike, able to effectively self-broker, creates new challenges.
The rules for trading crypto and hopefully soon back applied to traditional markets, need to both protect the investor whilst not denying them the access to investment products and methods of trading that have been the preserve of institutional market participants only.
The challenge for Exchanges is often trying to understand the challenge for regulators and then good planning to make sure, however the Regulators choose to address those challenges, the Exchange is prepared. This will vary according to jurisdiction but in large part if you are passionate about doing the right thing for your clients, as we at Bitstamp are, you won’t stray far from any regulator’s requirements.
There is a lot of discussion about the use of artificial intelligence within compliance programs. What’s your view of incorporating machine learning into your operations and do you think rules-based systems will remain a core part of your strategy?
For me, rules-based systems will continue to maintain primacy. AI can play a part in helping with refinement of parameters empirically over time, but the fundamental constructs of market abuse and manipulation have to remain explicit and completely understood by those charged with monitoring them.
Engagement with Regulators is done by people in the Market Surveillance Department not machines. They have to fully understand what they are looking for, why they are looking for it and explain in detail when they see it happen. Surveillance Systems are a Surveillance Officer’s tools of the trade. They cannot reliably replace the human thought process or the ability to reframe perspective and apply disparate mitigating factors. Market Surveillance tools shine a light on specific suspicious activity, AI can make that light brighter but ultimately a human has to see, understand and act on what has been illuminated.
Finally, where do you see the biggest growth for the Crypto Industry in the next 5 years, and how does Bitstamp plan to stay on top of the wave?
It’s a question almost as difficult as predicting what the price of Bitcoin will bein 5 years. Things move so rapidly in crypto, new things emerge, become enormous in a short space of time and sometimes disappear from relevance even quicker. Lessons are learned from the embers of failed projects and quickly incorporated into the collective body of knowledge.
The key to Bitstamp continuing to prosper is how well we remember the quote, often attributed to Charles Darwin, about it not being “the strongest or the most intelligent that survives but those most adaptable to change”. We were the first Crypto Exchange in Europe back in 2011, crypto and Bitstamp have adapted and changed an awful lot since then, but our core philosophy has remained. We will always be a trusted partner and good actor in the space. It will be exciting to see our next adaptation!