Coinbase: We Don’t Engage in Proprietary Trading, AG Report Incorrect
The office of the New York State attorney general released a report on September 18th on what’s known as the Virtual Markets Integrity Initiative. According to the report, a number of major US-based cryptocurrency exchanges allegedly engaged in proprietary trading. The following day, Coinbase released a statement claiming that the attorney general’s report is incorrect. They argue that “Coinbase does not trade for the benefit of the company on a proprietary basis.”
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What Is Proprietary Trading?
Proprietary trading is a legal gray area. According to Investopedia.com, proprietary trading is “when a firm or bank invests for its own direct market gain instead of earning commission dollars by trading on behalf of its clients.” In simple terms, it’s when any kind of investment entity uses its own resources to buy and sell investment assets for its own gain.
Proprietary trading is not always acceptable, as it may introduce a conflict of interest between the brokerage and its clients. One example might be if a brokerage is engaging in proprietary trading, they may want to give themselves an unfair competitive advantage since they have better, faster access to their own trading platform. This would of course come at a cost to the brokerage’s customers.
Writing for Compliance Week, author Harvey L. Pitt wrote:
“When firms engage in both customer and proprietary trading, as virtually all firms do, the economic inducements to traders and firms create the potential for serious conflicts of interest that can compromise a broker’s delivery of its fiduciary obligation to achieve best execution of its customers’ orders.”
We Are Not Guilty, Says Chief Policy Officer
The details in the attorney general’s report suggesting that Coinbase engages in proprietary trading were released by Coinbase itself. But the company’s statement, released on September 19th, argues that the attorney general got it wrong. Specifically, the company claims there is a misunderstanding of how Coinbase manages the interactions between its different products.
The statement in question from the attorney general’s report reads:
“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.”
This, according to Coinbase, is incorrect.
If a user logs on to Coinbase.com and buys some bitcoin, what’s actually happening is that the user is buying bitcoin through a simplified interface that connects to the Coinbase Pro platform (formerly known as GDAX). The standard Coinbase.com interface is designed to be as simple as possible.
It aims to make it easier for new or inexperienced traders to buy digital assets. Coinbase Pro users need to understand the complexities of a full-featured trading platform. This, of course, presents a much higher barrier to entry for those new to cryptocurrency.
According to the statement released by Chief Policy Officer Mike Lempres, about 20 percent of Coinbase trade volume is processed through this interface. In other words, according to Coinbase, they are not engaging in proprietary trading for their own benefit. Instead, they are facilitating trades through buy and sell orders made on their simplified interface.
Other Exchanges Yet to Speak Up
Coinbase may have an explanation for what the report referred to as proprietary trading. However, that same report includes several other major US-based cryptocurrency exchanges that are also allegedly engaging in proprietary trading.
For example, Poloniex, owned by Circle, said that less than one percent of its total volume of trades were proprietary trades. But BitFlyer USA “indicated that its own activity accounted for approximately ten percent of the executed volume on its platform.”
Sound off below. Is Coinbase being forthright when it claims it does not engage in proprietary trading?
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