101 Derivative Market Manipulation

# 101 Derivative Market Manipulation A short case study of market manipulation using derivatives. In our scenario, A will offload a large holding of tokens, which the spot market cannot absorb. - A and B both start with no positions on PIO or Binance ``` - Binance Orderbook[ Price: 100, Limit Sell : $1B ] ``` - A creates an RFQ to long $10B of SUSHI - A Create a Limit Sell of $10B to sell his tokens ``` - Binance Orderbook[ Price: 100, Limit Sell : $11B ] ``` - B sends RFQ Response accepting the offer - A sends on-chain PushQuote for $10B of SUSHI - B calls AcceptQuote for that order - Recap: B has $10B Short SUSHI Exposure ``` - Binance Orderbook[ Price: 100, Limit Sell : $11B ] ``` - B buys $10B of SUSHI on Binance on A's Limit Sell ``` - Binance Orderbook[ Price: 100, Limit Sell : $1B ] ``` - Recap: B has $0 Exposure - A shorts $10B of SUSHI on Binance (Which pushes prices down) - SUSHI goes down, causing A to be liquidated. - Recap: B has $10B long SUSHI exposure on Binance ``` - Orderbook[ Price: 100, Limit Buy : $1B ] - Orderbook[ Price: 90, Limit Buy : $1B ] - Orderbook[ Price: 50, Limit Buy : $9B ] ``` - B sells $10B of SUSHI on Binance ``` - Orderbook[ Price: 100, Limit Sell : $9B ] - Orderbook[ Price: 100, Limit Buy : $0 ] - Orderbook[ Price: 90, Limit Buy : $1 ] - Orderbook[ Price: 50, Limit Buy : $9B ] ``` - B sold $1B at 100. Remains $9B to Sell - B lower his limit price to match to next buyers at 90 ``` - Orderbook[ Price: 100, Limit Sell : $9B ] - Orderbook[ Price: 90, Limit Buy : $0 ] - Orderbook[ Price: 50, Limit Buy : $9B ] ``` - B sold $1B at 90. Remains $8B to Sell - B lower his limit price to match to next buyers at 50 ``` - Orderbook[ Price: 100, Limit Sell : $9B ] - Orderbook[ Price: 90, Limit Buy : $0 ] - Orderbook[ Price: 50, Limit Buy : $1B ] ``` - B sold $8B at 50. Remains $0B to Sell - Recap: B has $0 Exposure Key takeway : A open Longs on PIO, and becausee he knows B will buy in reaction to equilibrate his books, So A sells to B at that moment. ## Solutions : #### Case of non-manipulatin majority * Onchain RFQ allows the MM to scan the user and define if the trade is likelly to be a market manipulation. * Conservative collateral requirements to cover volatility. #### Case of market manipulator majority ( smaller assets ) - CCPs for large traders where all market participants liquidity is bound to all CCPMs.