[Michael_Murray]

I have no inside information, but the pattern suggests to me a plausible explanation. And I'm typing on my phone, so I might not explain fully.

Suppose I were wanting to overinflated the value of my business to show to investors or for another reason - I could create an account that had within it a large additional amount of fiat (by entering that value in the DB).

Then, I have an idea... Using that fake deposit, I can start buying BTC. And, as long as the price of BTC is going up, I'm actually printing money and making real fiat out of the initial fake deposit.

This works as long as the price continues to increase and people continue to trade - if either of those factors trends down, the fake fiat will be noticed.

Unwinding this becomes tricky - if you sell too fast, you cause the price decrease. And if anybody gets wind of it, they'll abandon ship.

In some ways, this has an analogue in what happened at Lehman and AIG. The CDO market worked as long as the default assumptions were right and the value of the underlying assets continued to appreciate - as soon as they didn't, the margin requirements wiped out all of their reserve capital.

It also reminds me a bit of QE - the "printed" fiat was inserted in to the market and used to purchase assets in a way that supported the market. When he easing stops, if the value of the assets can't be supported by continuing market pressure, the market for those assets crashes.

[dmichulke]

If your story is valid then - in some sense - Willy was less risky than Lehman was because the reserve ratio (assuming 10 mn$ of "printed money") was only a fraction of the existing money (I suppose less than 10%), so they operated with a reserve of >=90%

Lehman on the other hand had a leverage of approx. 30 = a reserve of 3.3%

Seems like the existence of a regulator for Lehman / AIG had some impact, just not quite the intended one.

[steve_taylor]

> Unwinding this becomes tricky - if you sell too fast, you cause the price decrease. And if anybody gets wind of it, they'll abandon ship.

My thoughts exactly. There are far less risky ways for an exchange to rip off its customers with out their knowledge, such as front running. That is, the insider can use lag to effectively trade with advance knowledge of the market. (Remember those long bouts of massive lag?) This doesn't require market manipulation and every single pair of trades is profitable.

[orclev]

Another piece of this puzzle might be shenanigans early on in the history of MtGox. There's been some speculation that something happened early on and MtGox lost a lot of BTC (either a hack, a glitch, or possibly a HD failed with a wallet that didn't have a backup). From that point on they basically scrambled to make up the deficit in BTC through various shady means, one of which might be this bot. There's an oblique reference to that theory early on in the report when they mention trading a BTC deficit for a fiat deficit. Basically they traded cash they didn't have for BTC they didn't have but needed in order to prop up the orders they had outstanding.