The SBF should have given up on Alameda and focused on FTX

Interviewee: Yoann Turpin @Wintermute Co-founder

Interview: BlockBeats

Compiled by gm@BlockBeats

Liquidity is the lifeblood of all trading markets, whether in traditional financial markets or crypto markets, and market makers play a pivotal role.

In short, making a market is a two-sided offer to any given market, providing the market size of both buyer and seller; Market making strategy is a strategy of setting up limit orders respectively, using the fluctuation of the underlying price to trigger the limit order, and obtaining trading profits through the difference of the order. Without market makers, the market would be relatively illiquid, impeding the ease of trading.

And after the FTX incident, with the disappearance of Alameda, one of the leading market makers, liquidity in the crypto market is falling sharply. The liquidity gap widened as other market makers including Genesis, Amber Group and Wintermute also suffered losses due to the collapse of FTX. This comes less than half a year after the debacle of another leading market maker, 3AC, which once again cast a shadow over the crypto market and made it difficult to make markets.

However, in a recent Forbes report, Wintermute said that despite having $59 million locked up in FTX, its overall financial position remains strong. In addition, 3AC, which like Wintermute was also a market maker for FTX, once revealed that the reason for its collapse was that FTX/Alameda had hunted its position.

BlockBeats asked Wintermute how they felt about the FTX crash and the 3AC Revelations. The following is a transcript of the interview:

BlockBeats: Please briefly introduce Wintermute and its relationship with FTX/Alameda. Is Wintermute involved in FTX events?

Wintermute:We are one of the largest market makers of spot and derivative cryptocurrencies, as well as offering over-the-counter trading. Wintermute is an FTX customer and Alameda competitor.

BlockBeats: How do you feel about the FTX crash, and will it set the industry back years?

Wintermute:The FTX event is likely to go on for months, but not years. It's a big trading platform, one of 500 cryptocurrency trading platforms. But we think the collapse of 3AC will be even more damaging to the industry as it undermines trust across the lending community.

BlockBeats: How do you view the relationship between FTX and Alameda, is there insider trading on FTX by Alameda?

Wintermute:To be sure, Alameda provided liquidity on FTX, where Alameda may initially have a very high market share. That is fine in itself, but when market making becomes unprofitable, independent market makers generally stop providing liquidity, but Alameda cannot.

We had no information about insider trading, and even though we competed with Alameda, our team did not find any bad trading.

BlockBeats: Zhu Su has previously stated publicly that "it was FTX/Alameda that hunted down their positions and ultimately caused them to lose all their funds and those of LP/ creditors. In the case of the Luna crash, the selloff that resulted in a three-day drop of up to 99% caused huge losses to 3AC due to Alameda's authority not to be liquidated on FTX." Do you agree with that, or is he hoping to pin 3AC Thunder's failings on FTX to pave the way for his own new Dubai launch?

Wintermute:We have seen nothing to support that claim, and even if it were, it would do nothing to rebuild the trust they lost when they lied to their creditors. But it is clear that 3AC's strategy is not flexible enough in the event that these positions could be "hunted". Funds with strict risk monitoring generally stress test their strategies, but they do not appear to have.

My experience as a former trader is that it is a very bad sign for a trained trader to blame someone else for the loss.

BlockBeats: Assuming that Alameda is indeed responsible for 3AC's huge losses, then how did Alameda operate in the unilateral market like Luna crash?

Wintermute:Alameda allegedly lost money on Luna, which is partly to blame for 3AC's collapse. Regarding Alameda's strategy, Alameda seems to be shifting from diversification strategy (spot vs. futures...) around the end of 2020-2021. The shift to directional bets, which explained their initial remarkable gains in 2021, may well have been their undoing.

BlockBeats: As one of the main market makers of FTX, has Wintermute ever encountered such a situation as Zhu Su mentioned?

Wintermute:No.

BlockBeats: A trading platform usually has several market makers. Is the relationship between these market makers cooperative or competitive? How do they make market for the exchange under different market conditions? What are the risks?

Wintermute:We have a friendly and constructive relationship with other legitimate market makers, but it is a competitive environment on and off the trading platform. We are all competing to give people the best price so that they trade based on our offer and not primarily the competition.

But no market maker aims for 100% market share, which peaks at 25-40% in most cases, and market makers also like competition because it helps with price discovery.

BlockBeats: Genesis and DCG are also experiencing liquidity crunch recently. Do you think they will eventually declare bankruptcy? If so, what will be the impact on the industry?

Wintermute:They do seem to be in a critical challenging period, and the impact could be significant, as products such as GBTC are part of many US pension funds.

BlockBeats: What other CeFi institutions do you think are still highly leveraged and high risk?

Wintermute:Don't want to speculate, but it seems the risk isn't over yet.

BlockBeats: FTX incident has also attracted regulatory attention. Do you think the crypto industry will see comprehensive regulation next year? What are your suggestions for practitioners?

Wintermute:We are constantly reviewing the policy situation. Although the FTX was regulated, it did not prevent its collapse. Practitioners should hire good regulatory consultants to understand how this will affect their business.

BlockBeats: From building a $32 billion crypto empire to collapsing in two or three days, how would you describe SBF? Both based on this incident and its impact on the industry.

Wintermute:He may have originally meant well, but he was at the very least a very bad trader: once Alameda went bust, he should have let go and focused on the FTX. FTX has a rich product range and seems to have found the right balance between innovation and regulation. Now, given the healthy governance of the crypto space and their disregard for user assets, it's clear that he should never be a trading platform operator again.

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