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Federal Register / Vol. 86, No. 172 / Thursday, September 9, 2021 / Notices
concurred with the finding that the futures market leads the spot market.
The research results discussed above build upon the already emerging academic consensus,46 demonstrated using multiple analytical models, that the Bitcoin Futures market does lead the spot market such that a would-be manipulator would necessarily conclude that it must trade in the futures market to successfully manipulate the spot price of bitcoin.

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The Trust Will Not Be the Predominant Influence on Prices in the Bitcoin Spot and Futures Markets The second element to determine whether a market or group of markets is of significant size requires that it is unlikely that trading in the ETP would be the predominant influence on prices in that market. The Exchange also believes that trading in the Shares would not be the predominant force on prices in the Bitcoin Futures market or spot market for a number of reasons, including the significant volume in the Bitcoin Futures market, the size of bitcoins market cap approximately $1
trillion, and the significant liquidity available in the spot market. In addition to the Bitcoin Futures market data points cited above, the spot market for bitcoin is also very liquid.
According to data from CoinRoutes from February 2021, the cost to buy or sell $5 million worth of bitcoin averages roughly 10 basis points with a market impact of 30 basis points.47 For a $10
million market order, the cost to buy or sell is roughly 20 basis points with a market impact of 50 basis points. Stated another way, a market participant could 46 See, e.g., Burcu Kapar and Jose Olmo, An Analysis of Price Discovery Between Bitcoin Futures and Spot Markets, Economics Letters 174
January 2019 . . . The Bitcoin futures market dominates the price discovery process.; Erdinc Akyildirim, The Development of Bitcoin Futures:
Exploring the Interactions Between Cryptocurrency Derivatives, Finance Research Letters 34 May 2020 While analysing breakpoints in efficiency, we verify the view that Bitcoin futures dominate price discovery relative to spot markets.;
Alexander Chang, William Herrmann and William Chai, Efficient Price Discovery in the Bitcoin Markets, Wilshire Phoenix October 2020 We conclude that the CME bitcoin futures contribution to price formation was greater than the contribution from the related spot markets made up of the Constituent Exchanges, indicating that the futures lead the spot markets and thus contribute more to price formation. . . .This analysis was performed using a methodology similar to the one employed by the Division of Economic and Risk Analysis at the SEC to evaluate the IEX exchanges contribution to price formation in the equities markets.
available at https www.wilshirephoenix.com/
efficient-price-discovery-in-the-bitcoin-markets/.
47 These statistics are based on samples of bitcoin liquidity in USD excluding stablecoins or Euro liquidity based on executable quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during February 2021.

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enter a market buy or sell order for $10
million of bitcoin and only move the market 0.5%. More strategic purchases or sales such as using limit orders and executing through OTC bitcoin trade desks would likely have less obvious impact on the marketwhich is consistent with MicroStrategy,48 Tesla 49
and Square 50 being able to collectively purchase billions of dollars in bitcoin without resulting in significant price movements.
The results from a study conducted by CF Benchmarks simulating to determine the extent of slippage i.e., the difference between the expected price of a trade and the price at which the trade was actually executed offer further evidence that trading in the Shares is unlikely to be the predominant influence in either the bitcoin spot or futures market.51 The CF Benchmarks Analysis simulated the purchase of 50
bitcoins a day for 686 days an amount chosen specifically to replicate hypothetical trades by a bitcoin ETP
and found that the maximum amount of slippage on a particular day was 0.3%, with the remainder of values between 0% and 0.15%. Thus, according to CF
Benchmarks, the slippage in this study could be described as having been largely negligible or, at most, minor during the observation period.52 While the study focused on the impact of a hypothetical ETP in the bitcoin spot market, arbitrage mechanisms in the spot and futures market dictate that it would be unlikely for a Bitcoin Futures ETP such as the Trust to overrun the Bitcoin Futures market without also overrunning the bitcoin spot market.
Accordingly, the CF Benchmarks analysis further bolsters the Exchanges contention that the Trust and other similar ETPs would be unlikely to overrun the market.
As such, the combination of Bitcoin Futures leading price discovery, the overall size of the bitcoin market, and 48 See Form 10Q submitted by MicroStrategy Incorporated for the quarterly period ended September 30, 2020 at 8: https www.sec.gov/
ix?doc=/Archives/edgar/data/1050446/000156459
020047995/mstr-10q_20200930.htm.
49 See Form 10K submitted by Tesla, Inc. for the fiscal year ended December 31, 2020 at 23: https
www.sec.gov/ix?doc=/Archives/edgar/data/
1318605/000156459021004599/tsla-10k_
20201231.htm.
50 See Form 10Q submitted by Square, Inc. for the quarterly period ended September 30, 2020 at 51: https www.sec.gov/ix?doc=/Archives/edgar/
data/1512673/000151267320000012/sq20200930.htm.
51 See CF Benchmarks, An Analysis of the Suitability of the CME CF BRR for the Creation of Regulated Financial Products, December 2020 the CF Benchmarks Analysis, available at: https
docsend.com/view/kizk7rarzaba6jxf.
52 Id.

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the ability for market participants, including authorized participants creating and redeeming in-kind with the Trust, to buy or sell large amounts of bitcoin without significant market impact will help prevent the Shares from becoming the predominant force on pricing in either the bitcoin spot or Bitcoin Futures markets, satisfying part b of the test outlined above.
For these reasons, the Exchange believes that all evidence strongly suggests that the CME Bitcoin Futures market has matured to a market of significant size for purposes of the Commissions standard of review as a a would-be manipulator of either bitcoin or Bitcoin Futures would necessarily have to execute its scheme on the CME
in order to manipulate the ETP; and b the proposed ETP is unlikely to be the predominant influence on prices in that market as the absolute size of both the futures and spot markers have grown tremendously since the prior disapproval orders.
Other Means To Prevent Fraudulent and Manipulative Acts and Practices As noted above, the Commission also permits a listing exchange to demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement. The Exchange maintains that the CME CF
BRR is not readily susceptible to manipulation due to the design of the methodology, which adequately protects the Trust from potential price manipulation in the Bitcoin Futures and spot bitcoin markets.53 The use of medians in the methodology reduces the effect of outlier prices on one or more constituent exchange.54 The volumeweighting of medians filters out high numbers of small trades that may otherwise control the value of a nonvolume weighted median.55 The use of twelve non-weighted partitions assures that price information is sourced equally over the entire observation period.56 Influencing the rate would therefore require trading activity during multiple partitions on several exchanges over an extended period, which would prove a costly and an operationally intensive undertaking. The methodology is designed to remove the reliance on any single contributing exchange, where 53 See CME CR Cryptocurrency Reference Rates Methodology Guide Version 9.0 July 31, 2021, available at https docscfbenchmarks.s3.amazonaws.com/CME+CF+
Reference+Rates+Methodology.pdf.
54 Id at 6.
55 Id.
56 Id at 13.

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