Crypto is flooded with liquidity so market making is like selling ice to an eskimo.

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.

> Crypto is flooded with liquidity so market making is like selling ice to an eskimo.

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?

Of course sophisticated tradfi players are in crypto and have been for years making hand over fist in money.

Source: I work at a firm that does this.

Great! I'm just continually surprised, because my firm is 4 people with a combined 1.5 years of very outdated tradfi experience and these markets are very good to us.

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.

How is information on order books non public? Usually crypto order books are public APIs.

Some examples of hidden information that doesn't generally get disseminated in exchange orderbook APIs:

* 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).

Thanks, yeah attribution is an interesting one. You usually have the cryptographic address of the maker but not any link to FTX account that might be responsible, and as you say the ability to correlate an order with other positions

> 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.

The order book from the API is at the very minimum delayed (by network and protocol latency if nothing else) and aggregated/sampled (full feed is too big), so an insider can have an advantage of more complete and timely data.

That's for honestly run APIs, then an exchange can play some games with that feed if they want to...

It depends on the time, it's public after the fact, but not-public during the time gap where someone like Alameda could do front-running by managing to get in other transactions before the loser's orders get executed, or before any others get the chance to take that order.

Alameda was in general deeply incompetent. Front running your customers is not all that doable if you insist on using python.

You don’t need speed to front run someone you need special access, which Alameda had.

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.

Even if you have special access, if you need 40ms (500ms p999) to compute a square root, you're not gonna be able to make worthwhile decisions on the basis of this access

Those times are wildly inaccurate on modern hardware with modern python, fwiw.

These are our observed latencies for their risk checks after sending millions of orders per day for months at a time (which doesn't sound like much, and isn't much, but is the entire order rate that they gave us while we were doing 0.5% of the maker volume on their exchange).

So it’s not, as you previously stated, the time to compute a square root?

That seemed to be the most computationally demanding portion of their public documentation of the formulas involved

You’re stating confidently that python is orders of magnitude slower than it actually is because of some pseudo code, which you haven’t seen implemented, and you called into across a network link?

…do you see the problem?

Arrogance, they thought they were smarter than the market.

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.

Judging from some of the videos that circulated from the Alameda CEO I'd say it's also a significant portion of incompetence. I'm not going to guess which one was more though.

Front running requires pretty invasive changes to the very performance critical parts of the trading engine. You have to analyse the queued trades, decide on a trading strategy and insert new trades, all without inserting too much latency.

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?)

Yeah its not as simple as putting two limit orders and collecting your fee. Market makers take huge risks when there is a big market move. When Luna crashed for example Alameda provided exit liquidity to traders and was left holding the bag.

A lot of people have said this, but that day was easily the best day to be quoting. There was lots of volume on both sides all day, even as the price increment became very large compared to the price

You mean kind of like how the US market works now with PFOF?

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?).

There was huge amounts of money to be made. They got too greedy, made a play for it, then the market dropped. If things kept going, it would have made them all a lot of money.

You can't "just make a bunch of cash" by market making. It is extremely competitive and it wouldn't surprise me if they weren't capable of doing it.

SBF, through his industry connections, was able to figure out how to take the difference while trading Bitcoin between different countries, as the premiums are different. It's basically a legal money printer.

I am baffled by why fraud was necessary. I guess it's just means to an end for "effective altruism".

Kimchi premium was arbed away.