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How Flash Boys Trading Bots affect crypto exchanges

Maya Mandzikasvili | Apr. 17, 2019
How Flash Boys Trading Bots affect crypto exchanges

April 17, 2019, | AtoZ Markets - Researchers at Cornell Tech have recently published a report which revealed the manipulations of the Flash Boys trading bots running on decentralized exchanges. According to Professor Ari Juels, the Flash Boys trading bots are usually used by large firms and enable to make a profit by placing their transactions at the forefront.

Flash boys in a brief

The term “Flash Boys” was first time mentioned in a Bloomberg contributor’s Michael Lewis book “Flash Boys: A Wall Street Revolut”.

The book represents an investigation of the high-frequency trading (HFT) in the US equity market, with the interviews and the experiences of several individuals working on Wall Street.

Lewis's book alleged that the equity market was rigged in favor of high-frequency trading firms that profit from high-speed data links with stock exchanges. The author concluded that HFT is used as a method to front run orders placed by investors.

Cornell Tech research of the flash boys trading bots

The Cornell Tech paper authors have been tracking a select six decentralized exchanges in real time since October and examined historical data. On the six exchanges, they spotted more than 500 bots currently making up to $20,000 a day. According to the research group the exchanges, where activities like front running took place include exchanges like EtherDelta and Bancor.

As the researchers and several other universities report, “Flash Boys” practices are likely on certain centralized cryptocurrency exchanges.

One of the lead scientists of the Cornell Tech research group, during one of his phone interviews, noted:  

"These bots exhibit many similar market-exploiting behaviors - front running, aggressive latency optimization, etc. - common on Wall Street, as revealed in the popular Michael Lewis expose ‘Flash Boys.”’

To better understand how Flash boys trading bots practices were possible the researchers built their own bot, to their surprise, even received buyout offers, Juels said.

Flash boys trading bots benefit from ordinary users

As per the report, the flash boys trading bots are anticipating and profiting from ordinary users’ trades on decentralized exchanges, which let them trade more directly. According to the researchers, the firms that deploy the flash boys trading bots programs manage to get priority ordering by paying higher fees and use that advantage for practices such as front running, in which traders can see orders from others and manage to place their own first. Juels noted that the crypto bots’ use can be so lucrative, it would pay for a miner to execute a 51-percent attack, in which computers take over the network of a particular coin.

Certain cryptos fall after Flash Boys trading bots report

The local media reports that four of the five top cryptos slid by market cap after

“Flash Boys trading bots” report was published. The press reports:

The Cornel Tech study is the latest warning appearing on crypto a market that has been beset by allegations of manipulation since its onset a decade ago, including a recent report that said nearly 90 percent of exchange volume was suspect.

DEX design flaws on the radar

While decentralized exchanges (DEXes) still account for only a small fraction of overall trading volume, their usage is expected to grow, due to the world’s largest centralized crypto exchanges like Binance. The aforementioned crypto exchange is building out its own decentralized exchange, and many other centralized crypto exchanges are following suit.

The eight authors of the Cornel paper explained that the DEX design flaws threaten underlying blockchain security. The group described a community of flash boys trading bots that arose to exploit it.

The researchers studied the design flaws of DEX, which generated flash boys trading bots, measured and simulated the behavior of these bots, and covered the systemic ecosystem risks of a smart contract arising from observations.

In a presentation last week during a blockchain conference at Cornell Tech’s New York City campus Ari Juels added :  

"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."

"This should incentivize the community to consider new exchange designs," Juels concluded.

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Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ, nor should they be attributed to AtoZMarkets.