Apparently, trading against oneself is so commonplace at Binance that the exchange is proudly announcing self-transaction prevention (STP).
No, STP won’t stop Binance executives from trading against their customers, despite the general prevalence of this industry practice. Instead, Binance executives are adding this “feature” for customers to stop trading against themselves — a full six years since the founding of Binance.
It appears that the practice is so rampant that rolling out the feature will take several weeks. Binance customers may continue to trade with themselves until October 26 at 16:00 EDT.
That window opportunity may be around for longer. Detailed API documentation provides computer codes for users who wish to continue trading against themselves, even after STP becomes a default setting.
Trading against themselves with real money
Trading against oneself might appear absurd on its face. It’s a guaranteed way to lose money on trading fees and, seemingly, little more.
However, trading against oneself inflates transaction volume, which is an enviable metric for marketers as a gauge of liquidity. If a token is frequently traded, it appears to be popular.
Self-dealing can also just be a mistake when executing complex or high-frequency trades. Indeed, Binance boasts that the feature will prevent unnecessary self-executed orders and reduce related fees. The changes will impact API users, as well, who are often the most frequent traders.
Binance’s new program to protect customers from themselves involves three self-transaction prevention modes, including a default EXPIRE_MAKER mode that will, on October 26, prevent self-dealing spot and margin transactions.
API users can change that mode using the API parameter selfTradePreventionMode. They can also send a query about the modes allowed by each trading pair with the allowedSelfTradePreventionModes parameter.
Scrubbing the exchange of self-dealing
Binance might be trying to cut down on the appearance of self-dealing with these changes to the API. Even though STP does not prevent Binance from trading against its own customers (for its part, Binance categorically denies that it trades against its own customers) many authorities are concerned about this possibility.
Securities and Exchange Commission (SEC) chair Gary Gensler has said, “Crypto’s got a lot of those challenges — of platforms trading ahead of their customers… In fact, they’re trading against their customers often because they’re market-marking against their customers.”
Authorities often regard self-dealing as an activity in which a counterparty acts in its own interests rather than the interests of its clients.
Most self-dealing involves profiting from transactions executed on behalf of another party. Examples typically include buying or selling company shares before executing a large buy or sell order for a client, pursuing an opportunity meant for a partnership without telling other partners, or improperly taking ‘kickbacks’ to favor a single contractor when awarding contracts.
Self-dealing can also include trading against one’s own customers, as several digital asset exchanges got caught doing. FTX became an especially egregious example when it got caught siphoning off customer funds to send to Alameda Research. Then, in supreme irony, Alameda Research used customers’ funds to trade against those same customers.
In the digital asset world, this form of self-dealing goes as far back as Mt. Gox and its infamous ‘Gox Bot.’ More recently, the Commodity Futures Trading Commission (CFTC) alleged that Changpeng Zhao used proxies like Sigma Chain and Merit Peak to transact against Binance customers.
Regulators’ actions against exchanges, including Binance, might have spooked the exchange into altering its APIs to reduce self-dealing and customer self-trading. It says the move will help reduce unnecessary fees.