The Challenges of Surveilling Crypto Futures and OTC Markets

Cboe Digital Insights
6 min readMay 30, 2019


Last week ErisX addressed recent research related to market manipulation in crypto markets and shared how our operational model seeks to avoid and actively combat the kinds of ‘malfeasance’ that has been reported on other centralized exchanges. This week we are working with our market surveillance partner, Eventus Systems, to provide more insight on how we are surveilling our own market center, taking into consideration the unique characteristics of this new asset class while applying proven regulatory guidelines.

The Challenges of Surveilling Crypto Futures and OTC Markets

Cryptocurrencies have come a long way since Bitcoin first surfaced 10 years ago, but markets are still lacking many of the basic attributes required to meet the needs of traders and investors. Crypto as an asset class will only reach its full potential when markets and exchanges have developed the same standard of core infrastructure that exists on other successful financial exchanges, including clear regulatory frameworks, transparent and active surveillance regimes, and robust custodial and clearing services. In this article, we examine the specific characteristics of our approach to surveillance in cryptocurrency markets. ErisX is tackling the many opportunities and challenges facing the digital asset industry and Eventus Systems is an ideal partner to help address these surveillance issues.

Using futures markets as a guide

The CFTC has determined that cryptocurrencies are commodities, a position that was affirmed in federal court in October 2018, and it follows that the standard rules and regulations for futures markets can provide the basis for market surveillance of cryptocurrency markets. There are, however, a number of unique attributes to the crypto market that sometimes require special treatment.

When it comes to surveillance of cryptocurrency markets, the basic practices and principles of futures markets are an excellent template to follow. Beyond the fundamental requirements of KYC and AML, futures market regulations define clear standards for record keeping and reporting of market activity, and rules that govern prohibited market behaviors. Recent research indicates that as much as 86% of bitcoin volume is suspicious or false and that 75% of cryptocurrency exchanges are reporting volume that is dubious. These activities understandably undermine confidence of the investing public. A well-run exchange or marketplace has clear definitions of what constitutes manipulation as well as the means to detect prohibited activity and impose penalties if rules are broken. In fact, it is imperative that crypto markets take such steps in order to grow and flourish, legitimately and sustainably. Longtime students of markets may take it for granted, but the behaviors that are prohibited by regulators in traditional markets have been prohibited for good reason; through time and experience they have proven to be detrimental to both honest market participants and markets overall.

In large part, cryptocurrency cash markets are regulated in much the same way that cash foreign exchange markets are. There is no one, central regulator for global activity. However, “non-regulated” is not the same as “unregulated” so market participants are advised to manage their conduct as if standard market rules and practices apply, even if they are not specifically detailed or spelled out. Just as there has been a move over the past several years to create and enforce a FX Global Code of Conduct, so too must the crypto trading space adopt and embrace best practices and continually improve and refine how its markets operate. At ErisX, we apply rules applicable to futures markets to the spot market.* This provides our market participants with clarity and transparency into how our markets operate, and bolsters our ability to maintain high levels of market integrity.

Unique characteristics of cryptocurrency markets

From a high level, trade surveillance issues such as wash trading, spoofing, layering, etc. are the same in crypto markets as they are elsewhere, but there are several characteristics that make these markets unique. For one, the markets are deeply fragmented and transaction and volume information may be untrustworthy. Also, there is no defined tick size in crypto markets as there is in an established market like futures, making it difficult to compare prices across markets. In addition, crypto orders of meaningful size may be found hundreds of price levels away from the best bid and offer compared with futures and equities where a majority of activity is at the top of the book. All of these factors lead to a very different set of inputs to create a coherent view of the market when compared to mature markets that trade products such as ES, SPX and SPY, where deep, thick order books and tight spreads with multiple interconnected hedging instruments means that examinations of manipulation can be concentrated around the bid and offer. It is axiomatic that manipulation is more likely in a less liquid market, and one that has high levels of volatility is even more vulnerable. Cryptocurrencies certainly fit that description.

Opportunities — and challenges — with AI

When it comes to conducting market surveillance, the application of artificial intelligence (AI) and machine learning tools is exploding and their application can be particularly relevant in an emerging market like cryptocurrencies. However, it is important to understand appropriate use cases of AI in order to ensure that the tools deliver utility based on their actual capabilities. One of the reasons we choose the Validus surveillance platform by Eventus was their application of AI technologies, which allow for increased market coverage and analytics, without the noisy, meaningless outputs that often plague AI and machine learning systems.

The strength of AI in surveillance is that it provides the means to expand beyond the bounds of surveilling for a set of standard, pre-defined behaviors. In a research paper, Ankura Consulting Group said it well: “AI has the promise to radically enhance an organization’s ability to comply with applicable regulations by allowing companies to marry human expertise with the almost limitless capability of computer systems to consume large sets of data and reduce problem complexity.”

Traditional, parameter-based surveillance strategies are perfect for well established, known trading behaviors or markets but they run the risk of being inflexible and limited in scope. AI, on the other hand, injects a greater degree of flexibility and expansiveness in monitoring market behaviors. A specific example of how Validus’ AI makes our surveillance more efficient and effective is in the screening of triggered alerts to identify those that deserve deeper examination. Millions of messages might yield thousands of potential alerts and AI can be used to prune this field to tens or scores of high-quality alerts for review. This ‘blended technology approach’ to alert generation and resolution provides excellent flexibility in how we surveil and monitor our markets.

Neither technology nor AI is a silver bullet, and can only be applied effectively when and where the right conditions are met, and when operated by knowledgeable and experienced staff who can understand and challenge the results. Knowing when and how to apply technology, alerts, filtering, and re-review comes from experience, and the professionals at both ErisX and Eventus have many years of that experience behind them.

Building for success

ErisX has built exchange and clearing infrastructure that will help lead to the growth and maturation of cryptocurrency markets. Eventus Systems has the breadth and depth of experience in market surveillance that is needed to address the unique and evolving needs of these markets. Success in these markets must be built on the bedrock principles of transparency, clear and thorough rules of conduct, and robust surveillance and regulation. The market will thrive if these conditions are met, and the Eventus tools allow us to deploy the processes necessary to enable these principles while paving the way for the inevitable market maturation and growth that we will see in the future.

* ErisX built a best-in-class compliance and legal framework, from the ground up, by importing the CFTC core principles for the regulated business (futures), also into the non-regulated business (spot) as a matter of best practice. This approach addresses the concerns in industry reports about conflicts, disclosures, governance, transparency, system safeguards, and orderly markets.



Cboe Digital Insights

Improving the digital asset trading and investing experience.