Coinbase Firmly Denies Accusation of Proprietary Trading

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Cryptocurrency exchange operator Coinbase has denied that it engages in proprietary trading and that these activities account for a large percentage of the firm’s overall trading volume.

Yesterday an investigation into cryptocurrency exchange policies and operations, published this week by the New York attorney general’s office (OAG), found that proprietary trading, through which an exchange operates a trading desk that trades on its own platform against its customers, is common within the crypto industry.

Per the report:

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“The OAG found that significant variation exists in the amount of trading activity attributable to those platform operators. Circle reported that it accounted for less than one percent of the executed volume on its platform Poloniex during the most recent time period reviewed. BitFlyer USA indicated that its own activity accounted for approximately ten percent of the executed volume on its platform. Another, Coinbase, disclosed that almost twenty percent of executed volume on its platform was attributable to its own trading.”

The OAG noted that, though this practice is also common within traditional securities markets, it raises “serious questions about the risks customers face on those platforms,” since it could mislead traders about the exchange’s true liquidity and hinder their ability to execute trades during periods of peak market volatility.

However, writing in a blog post published Wednesday, Mike Lempres, chief policy officer at Coinbase, said that the exchange operator does not engage in proprietary trading and that the volume cited in the OAG report stems from the company executing trades on behalf of its retail brokerage customers.

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He explained:

“Coinbase does not trade for the benefit of the company on a proprietary basis. In order to provide an easy-to-use customer experience, Coinbase Consumer quotes a price and then quickly fills the order from our exchange platform (Coinbase Markets). This takes advantage of the liquidity provided by the entire Coinbase ecosystem.”

When customers use the company’s traditional brokerage platform, now known as Coinbase Consumer, they see a single buy and sell price for each of the assets listed on the platform, rather than a full order-book as they would see on a centralized exchange.

After a customer places an order through the brokerage, the company fills the order from Coinbase Markets, its centralized exchange platform, though this action is hidden from the client, who simply sees the funds enter or leave their personal wallet.

Lempres further clarified that Coinbase neither operates an in-house trading desk nor acts as a market maker, through which a firm places buy and sell orders to increase a trading pair’s liquidity.

He said, “The volume figure stated in the report has been misreported in the media as ‘self-trading,’ which is inaccurate. The figure represents customer-driven volume via Coinbase Consumer. Coinbase does not operate a proprietary trading desk, nor does it undertake market making actions.”

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