Cooking the Order Books: Information Manipulation and Competition among Crypto Exchanges

Abstract

How competition affects manipulation by firms of information about important attributes of their products and how such information manipulation impacts firms' short-term and long-term performance are open empirical questions. We use a setting that is especially suitable to answering these questions---crypto exchanges, on which information manipulation takes the form of inflated trading volume. We find that both static and dynamic competition measures are positively associated with volume inflation, indicating that competition may lead to increased information manipulation. Exchanges that cook the order books (i.e., manipulate volume) obtain short-run benefits but are punished in the long run, consistent with the tradeoff between short-lived increases in rents and future losses due to damaged reputation.

Keywords: Crypto exchanges, volume inflation, competition, information manipulation

JEL Classification: G18, G23, L10, L13, L15