How the Pax Stablecoin Broke Tether
We discussed the rise of the new stablecoins in out last post. In this post, we investigate some anomalous trading activity on the Binance exchange. We propose that the more than 15% discount observed between tether and the US dollar on October 15, 2018 was the result of single-exchange arbitrage on Binance between three trading pairs involving the PAX token.
Tether Breaks the Buck
Below is a chart that shows the trade-by-trade prices for four stablecoin-stablecoin pairs on 4 exchanges; Poloniex USDC/USDT, Coinex USDC/USDT, Okex PAX/USDT and Binance PAX/USDT. Note the 20% spike on October 15 about 6AM UTC. The Coinex pair started trading later that afternoon, but the Poloniex, Okex and Binance pairs all had sudden moves in the premium paid for buying the USDC and PAX stablecoins with USDT.
Zooming in, the action started first on Binance and it took several hours before the same spike occurred on the Poloniex exchange. As well, the Binance trade action was on much higher volumes for a longer duration; with the price elevated by more than 10% for 4–5 hours including the typical secondary shoulder one sees in these types of extreme market moves.
The USDT premium on Binance was extreme, upwards of 20%, and sustained, lasting for about 10 hours. The total value traded on Binance of PAX/USDT between 5AM UTC and 4PM UTC on October 15 was 8.8M USDT for 8M PAX, an average premium of about 10%. Assuming parity could be obtained elsewhere for PAX and the US dollar, and participating in an outrageous 50% of the trading, about $400K was available for the lucky arbitrageur.
But there was far more money to be made trading the PAX/BTC and BTC/USDT pairs on Binance; a much more liquid pair with much higher dollar volumes traded.
Looking back at the first chart, we notice unusual premiums for USDT a full four days before the October 15 event. Plotted below is the trade by trade price action, shown in red, on Binance between October 11 and October 12. Also shown, in blue, is the prices for the USDT/USDC pair on Poloniex (price inverted) for comparison. Although dwarfed by the almost 20% spike a few days later, the premium between PAX and USDT was elevated to 3–4% on heavy volume October 11 — October 12. Although the Poloniex stablecoins pair also trended with the Binance activity, the Poloniex USDC/USDT pair was not as sustained, extreme or as heavily traded as the Binance PAX/USDT pair.
So what was happening on Binance that resulted in these price moves for the PAX/USDT pair?
PAX/BTC/USDT Arbitrage on Binance
Exchange arbitrage, exploiting differences in prices for the same pairs listed on different exchanges was one way to profit in 2017. Rumor has it that several of the larger crypto hedge funds made their returns the old fashioned way; simple exchange arbitrage. Of course, almost anyone can do this and once sufficient capital was deployed the easy money was arb’d out; the capacity for the exchange arbitrage strategy was reached.
For an example, below are the BTC/USDT prices on Binance and Poloniex over the day that include the market dislocation of October 15. Although one can observe a spike in the price of BTC relative to USDT, there was little opportunity for exchange arbitrage, at least in these two markets.
No doubt active exchange arbitrageurs kept the prices in sync.
However, there is a different story when looking at three pairs, all on the Binance exchange.