Understanding Internal Trading in Crypto Exchanges, And Why It's a Problem

One controversial issue that has sparked widespread concern is the use of internal traders by crypto exchanges a practice that, in many cases, toes the line of legality or even crosses it entirely.

But what exactly are internal traders, and why is this behavior considered problematic or even illegal?

What Are Internal Traders?

Internal traders are individuals or teams within a crypto exchange who use insider knowledge, such as user trading behavior, liquidity depth, or upcoming listings to execute trades. These trades may not be visible to the public and are often performed using the exchange’s own funds. Essentially, these traders operate behind the scenes with far more information than any regular trader could ever access.

This is similar to “proprietary trading” in traditional finance, where institutions trade using their own capital. However, in crypto, the lines between fair use and manipulation are often blurred, particularly when there’s no oversight or transparency.

Why Is This a Problem?

1.Unfair Advantage

Internal traders can see your stop losses, buy walls, and even pending orders. This allows them to front-run trades, a practice where they place their own orders just before yours, profiting from price movements that they helped initiate.

2.Market Manipulation

Exchanges can inflate or deflate prices, create fake volume (known as wash trading), or promote token pumps, all while profiting at the expense of regular users.

3.Breach of Trust

Traders rely on exchanges to offer a fair marketplace. If users find out that the platform is actively trading against them, it damages credibility and the broader trust in the crypto ecosystem.

4.Legal Consequences

In regulated markets, this kind of behavior is considered insider trading and is illegal. Regulatory bodies like the SEC have already investigated and charged some platforms for such activities. As crypto becomes more regulated, exchanges engaging in internal trading could face lawsuits, fines, or bans.

Not All Internal Trading is Illegal, But It Can Be Unethical

Some exchanges claim they use internal trading desks to improve liquidity or stabilize markets. While that might sound good on paper, without external audits and strict regulation, there’s no guarantee this won’t be abused.

For example, an exchange might buy a large chunk of a new token before listing it, then dump it on unsuspecting users once the hype drives the price up. This isn’t illegal in every country, but it's certainly unethical.

The rise of crypto was supposed to promote decentralization and transparency, but internal trading by exchanges contradicts those principles. As users, it's crucial to:

Research platforms before using them

Look for transparency, third-party audits, or decentralized alternatives (like DEXs)

Support regulation that promotes fairness and protects users

In the end, trust is everything. And any exchange secretly trading against its users deserves to lose it.

Understanding Internal Trading In Crypto Exchanges, And Why It's A Problem