I never understood why Alameda took risky bets when it could just make a bunch of cash off buy/ask spreads assuming trading volume was decent. Running the exchange they can front run any large trades and move the market.
These days a naive market making strategy in crypto just incinerates capital very reliably as the tiny bid ask spread is a small fraction of the adverse selection risk (whole spread moving past). They did probably make money on this in the early days and got smoked when the sophisticated tradfi players joined.
Front running large trades by looking at non public info on the order book is possible but this is also fraud, so not a strategy to avoid legal troubles, and it also only works if the large traders are naive and not adversarial (putting fake large orders to front run you etc).
What SBF could have done is close down Alameda when it was clear they were not competitive, and concentrate on growing the exchange by reinvesting the fees, but that would have clipped the growth and donations/acquisitions lifestyle to something much less flamboyant.
That said they are being accused of something much less sophisticated. They were allowed to take money out when they made money but didn’t have to pay money in when they lost.
…do you see the problem?
* Attribution: who's making the order?
* Short labelling... are they selling or shorting?
* Non-display or iceberg orders (not common in crypto?)
* Immediate-or-cancel orders... the executions hit the feed, but not the original order details. Also whiffs (order but no fill) don't get disseminated in any way.
* Certain order types that may rest on the exchanges order book but either don't have a specific price or display doesn't make sense... market orders, midpoint orders, pegged orders, auction order books (less common in crypto)
EDIT: On the attribution side -- they could also know the leverage any customer is taking and use that adversarially (which was the straw that broke their camel).
> Certain order types that may rest on the exchanges order book but either don't have a specific price or display doesn't make sense.
I suppose orders than are designed to only be consumed by a matching engine don't need to be made public unless they are matched.
That's for honestly run APIs, then an exchange can play some games with that feed if they want to...
This is not true at all, in general quoting in these markets is absurdly capital-intensive compared to tradfi.
> These days a naive market making strategy in crypto just incinerates capital very reliably as the tiny bid ask spread is a small fraction of the adverse selection risk (whole spread moving past). They did probably make money on this in the early days and got smoked when the sophisticated tradfi players joined.
Are the sophisticated tradfi players here yet? Seems like no?
Source: I work at a firm that does this.
For example, it's surprising that big tradfi players were not able to prevent take-only basis arb bots written in Python running on a un-tuned VPS from printing five figures on individual new listings in mid 2021, or permitted us to click trade tokenized stock quarterly futures minutes from expiry for nearly guaranteed profit also in mid 2021.
There are people who make a living playing poker that are not intellectually gifted. Their secret? Do as you say, play boring, safe strategies that will guarantee you will make money in the long run. They might not run up 1000$ to 10000$ very often but they sure do win. However, remove discipline, add intellectual ability and an abundance of overconfidence and you get FTX and Alameda Research.
It would be hard (but not impossible) to implement such functionality without dozens of software engineers being very aware of it's existence and the implications.
This kind of software change only touches the edges and can be done with much more plausible deniability. The exclusion to margin calls was a single if statement inserted by a single engineer with the justification Alameda were the primary market maker. The dashboard change might have been just a bug they avoided fixing (If you normally automatically margin call negative balances, why would your dashboard bother reporting negative balances?)
I am baffled by why fraud was necessary. I guess it's just means to an end for "effective altruism".
And the fact that by far the largest market maker in the US is also a hedge fund (two different companies with the same owner(s), where have we seen that before?).