6 ms·

FTX should never been in this position. They are an exchange. Nobody should be able to obliterate them by playing around with their crypto.

neural_thing 4y ago
Hard agree. While Binance prompted the downfall, FTX created all the conditions for it by playing fast and loose with its clients' money.
ww520 4y ago
They are an exchange that allows future trading and margin trading which require borrowing money/assets/coins. The FTT tokens were probably put up as collateral for loans. The drop of the FTT value probably triggers calls on those loans. Thus the liquidity crisis.
- swyx 4y ago
  that makes FTX a "shadow bank", not merely an exchange.
  - ironick09 4y ago
    It makes them a brokerage, doesn’t it? Not a shadow bank.
  - sytelus 4y ago
    It's worse than "shadow bank". It's bank who is allowed to print money at its whims and create any arbitrary leverage it wants.
    - eru 4y ago
      Well, that's what the 'shadow' in 'shadow bank' means: less/different regulation than a normal bank. That's not necessarily a bad thing, btw.
      - refulgentis 4y ago
        Where's the "bank" in this "shadow bank"? You're describing a casino with a money printer.
        eru 4y ago
        "Shadow banks" aren't necessarily "banks". See https://en.wikipedia.org/wiki/Shadow_banking_system https://en.wikipedia.org/wiki/Shadow_banking_system > The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that provide services similar to traditional commercial banks but outside normal banking regulations.[1] Examples of NBFIs include insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations.[2][3] The phrase "shadow banking" is regarded by some as pejorative, and the term "market-based finance" has been proposed as an alternative.[4]
        headsoup 4y ago
        You're moving the goalposts a bit there
        vba616 4y ago
        The phrase already existed. If there was no more to it than you could immediately guess from the words, then it would be a useless term.
        lupire 4y ago
        What would you say a non shadow bank is? "Money printing" is "just" a reserve ratio near or less than 0.
- STRML 4y ago
  It shouldn't work this way. Customer funds should be segregated from whatever prop trading the rest of the business is doing. The only way this happens is if the prop trading business is over-leveraged somehow and the exchange bailed it out with FTT. Customer deposits should meet liabilities 1:1. If they don't, somebody is lying.
  - barry-cotter 4y ago
    > Customer deposits should meet liabilities 1:1. If they don't, somebody is lying. That’s not how banking works. You hold illiquid assets. Sometimes they move in price. If they move enough in price you’re insolvent. Limiting bank runs is a genuinely hard problem.
    - zeven7 4y ago
      Exchanges aren't banks, and crypto exchanges especially shouldn't be banks. Crypto is liquid and can be redeemed in its own denomination instantly if you hold it in a simple wallet. That's what exchanges should be doing. They shouldn't be doing fractional reserve banking, and a run shouldn't be possible. Preventing runs on a crypto exchange is exceedingly easy if the operators aren't taking risks with client funds.
      - eru 4y ago
        Well, it seems the word 'exchange' in this case is used with a different meaning when applied to FTX than the meaning you have in mind.
        stale2002 4y ago
        Which is exactly the problem. This should be illegal, and people who do this should go to jail. Customer funds should be 1 to 1 backed with assets.
        deleted 4y ago
        [deleted]
- c-baby 4y ago
  That's called picking up pennies in front of a steam roller.
- vkou 4y ago
  Your margin account should be immediately liquidated and your positions closed if the value of your collateral drops below your outstanding obligations.
- vishnugupta 4y ago
  You are referring to liquidity providers and market maker; they provide the liquidity (in the form of loans for margin trading, among other things), take risk in exchange for market making fee. An exchange on the other hand is facilitating trades by matching buyers with sellers. At least that's how it works in stock markets. Even if NASDAQ were to become a market maker they would have to spin a separate entity, bring their own funds to provide liquidity. Even then I don't know if it's allowed by regulation.
  - HolyLampshade 4y ago
    > Even then I don’t know if it’s allowed by regulation It isn’t, precisely for this reason. The US Equity and Equity Derivative markets have tried a few times to get approval for initiatives using their already existing BDs (to facilitate inter-market order routing), and in every case it’s been blocked by the regulators as too risky to the underlying business. The issue here has more to do with the lack of a centralized C&S clearing house in crypto, and is one of the reasons counterparty risk remains such a massive issue there. Having to maintain an account at each exchange, much like you would a BD, and praying things don’t suddenly go pear shaped, strikes me as insane (and is one of the primary reasons I’ve avoided getting involved in the crypto space)
- ww520 4y ago
  Ok. To settle once for all whether FTX is an exchange or not. Below are the services they offer. Futures: ... with margins of up to 101x. Leveraged Tokens: ... up to three times the leverage. ... the leveraged coins offered by FTX don’t require any margin. Options: (standardish). MOVE: ... wager on the price movement ... a play on volatility. Spot Markets: ... more than 100 different spot trading pairs.
  - wklm 4y ago
    It's fine for a trading venue to list all these derivatives, the problem in this case is that the venue and issuer are the same entity. In the trad finance world this is strictly separated.
deleted 4y ago
[deleted]
mbesto 4y ago
But the free market dictated that they do because that's exactly the downside of their use of a crypto coin. How many exchanges will need to go under for the market to decide that isn't a great way to operate one? How much educating of users/customers will it take?
vishnugupta 4y ago
I was having this exact conversation with my friends y'day. An exchange marketplace shouldn't be in this position unless they are also participating in the market directly or indirectly through funds, their own and the customers' funds. Customers' assets (either crypto or fiat/USD) should be backed 1:1. The only reason for FTX to pause withdrawals and then assure investors that their money is safe is a sign that they are using customers' assets/funds to participate in the market. How long before SEC/regulators wake up and regulate these shadow-banks disguised as exchanges as other exchanges?
- JumpCrisscross 4y ago
  > having this exact conversation with my friends y'day There is a strong, vested interest in portraying FTX's collapse as a one off. Binance doing them dirty doesn't cast a pall across the industry. Fundamental problems, likely replicated systemically, does.
- ugh123 4y ago
  Sounds like a crypto ponzi scheme
- seanhunter 4y ago
  > An exchange marketplace shouldn't be in this position unless they are also participating in the market directly or indirectly through funds, their own and the customers' funds. Yes, although the limitation with this line of thinking is that in most market-related activities (including running an exchange) it's hard not to be structurally long the market in various important ways. For example as an exchange your commissions are going to be highly correlated with market activity and may also be per unit in some cases and so would be directly correlated with market prices in that case. As a second-order effect, customers' trading limits are going to be affected as prices fluctuate even if you don't directly offer margin yourself, because not only does the value of the thing they've deposited with you change and therefore affect how much other stuff they can sell this for but also they may have made that deposit by pledging collateral elsewhere and borrowing against that to create margin so that margin loan will be affected. You can definitely try harder to avoid the problem than FTX though which seems to have been pretty much all-in on it's own illiquid token (FTT) and Alameda using leverage on FTT as their main source of funding. One of the things I learned at Goldman during the crisis is that you can't rely on a mark for anything illiquid - you have to have a real liquid market price.
helsinkiandrew 4y ago
They're more a brokerage than an exchange - you can buy Bitcoin and Eth leaveraged at 20-1 through their perpetual futures. Whilst these are presumably hedged - FTX are still taking on risk. https://ftx.com/markets/futures https://ftx.com/markets/futures https://help.ftx.com/hc/en-us/articles/360024780511-Futures-Specs https://help.ftx.com/hc/en-us/articles/360024780511-Futures-...

neural_thing 4y ago

Hard agree. While Binance prompted the downfall, FTX created all the conditions for it by playing fast and loose with its clients' money.

ww520 4y ago

They are an exchange that allows future trading and margin trading which require borrowing money/assets/coins. The FTT tokens were probably put up as collateral for loans. The drop of the FTT value probably triggers calls on those loans. Thus the liquidity crisis.

swyx 4y ago
that makes FTX a "shadow bank", not merely an exchange.
- ironick09 4y ago
  It makes them a brokerage, doesn’t it? Not a shadow bank.
- sytelus 4y ago
  It's worse than "shadow bank". It's bank who is allowed to print money at its whims and create any arbitrary leverage it wants.
  - eru 4y ago
    Well, that's what the 'shadow' in 'shadow bank' means: less/different regulation than a normal bank. That's not necessarily a bad thing, btw.
    - refulgentis 4y ago
      Where's the "bank" in this "shadow bank"? You're describing a casino with a money printer.
      - eru 4y ago
        "Shadow banks" aren't necessarily "banks". See https://en.wikipedia.org/wiki/Shadow_banking_system https://en.wikipedia.org/wiki/Shadow_banking_system > The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that provide services similar to traditional commercial banks but outside normal banking regulations.[1] Examples of NBFIs include insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations.[2][3] The phrase "shadow banking" is regarded by some as pejorative, and the term "market-based finance" has been proposed as an alternative.[4]
        headsoup 4y ago
        You're moving the goalposts a bit there
        vba616 4y ago
        The phrase already existed. If there was no more to it than you could immediately guess from the words, then it would be a useless term.
      - lupire 4y ago
        What would you say a non shadow bank is? "Money printing" is "just" a reserve ratio near or less than 0.
STRML 4y ago
It shouldn't work this way. Customer funds should be segregated from whatever prop trading the rest of the business is doing. The only way this happens is if the prop trading business is over-leveraged somehow and the exchange bailed it out with FTT. Customer deposits should meet liabilities 1:1. If they don't, somebody is lying.
- barry-cotter 4y ago
  > Customer deposits should meet liabilities 1:1. If they don't, somebody is lying. That’s not how banking works. You hold illiquid assets. Sometimes they move in price. If they move enough in price you’re insolvent. Limiting bank runs is a genuinely hard problem.
  - zeven7 4y ago
    Exchanges aren't banks, and crypto exchanges especially shouldn't be banks. Crypto is liquid and can be redeemed in its own denomination instantly if you hold it in a simple wallet. That's what exchanges should be doing. They shouldn't be doing fractional reserve banking, and a run shouldn't be possible. Preventing runs on a crypto exchange is exceedingly easy if the operators aren't taking risks with client funds.
    - eru 4y ago
      Well, it seems the word 'exchange' in this case is used with a different meaning when applied to FTX than the meaning you have in mind.
      - stale2002 4y ago
        Which is exactly the problem. This should be illegal, and people who do this should go to jail. Customer funds should be 1 to 1 backed with assets.
        deleted 4y ago
        [deleted]
c-baby 4y ago
That's called picking up pennies in front of a steam roller.
vkou 4y ago
Your margin account should be immediately liquidated and your positions closed if the value of your collateral drops below your outstanding obligations.
vishnugupta 4y ago
You are referring to liquidity providers and market maker; they provide the liquidity (in the form of loans for margin trading, among other things), take risk in exchange for market making fee. An exchange on the other hand is facilitating trades by matching buyers with sellers. At least that's how it works in stock markets. Even if NASDAQ were to become a market maker they would have to spin a separate entity, bring their own funds to provide liquidity. Even then I don't know if it's allowed by regulation.
- HolyLampshade 4y ago
  > Even then I don’t know if it’s allowed by regulation It isn’t, precisely for this reason. The US Equity and Equity Derivative markets have tried a few times to get approval for initiatives using their already existing BDs (to facilitate inter-market order routing), and in every case it’s been blocked by the regulators as too risky to the underlying business. The issue here has more to do with the lack of a centralized C&S clearing house in crypto, and is one of the reasons counterparty risk remains such a massive issue there. Having to maintain an account at each exchange, much like you would a BD, and praying things don’t suddenly go pear shaped, strikes me as insane (and is one of the primary reasons I’ve avoided getting involved in the crypto space)
ww520 4y ago
Ok. To settle once for all whether FTX is an exchange or not. Below are the services they offer. Futures: ... with margins of up to 101x. Leveraged Tokens: ... up to three times the leverage. ... the leveraged coins offered by FTX don’t require any margin. Options: (standardish). MOVE: ... wager on the price movement ... a play on volatility. Spot Markets: ... more than 100 different spot trading pairs.
- wklm 4y ago
  It's fine for a trading venue to list all these derivatives, the problem in this case is that the venue and issuer are the same entity. In the trad finance world this is strictly separated.

deleted 4y ago

[deleted]

mbesto 4y ago

But the free market dictated that they do because that's exactly the downside of their use of a crypto coin. How many exchanges will need to go under for the market to decide that isn't a great way to operate one? How much educating of users/customers will it take?

vishnugupta 4y ago

I was having this exact conversation with my friends y'day. An exchange marketplace shouldn't be in this position unless they are also participating in the market directly or indirectly through funds, their own and the customers' funds. Customers' assets (either crypto or fiat/USD) should be backed 1:1. The only reason for FTX to pause withdrawals and then assure investors that their money is safe is a sign that they are using customers' assets/funds to participate in the market. How long before SEC/regulators wake up and regulate these shadow-banks disguised as exchanges as other exchanges?

JumpCrisscross 4y ago
> having this exact conversation with my friends y'day There is a strong, vested interest in portraying FTX's collapse as a one off. Binance doing them dirty doesn't cast a pall across the industry. Fundamental problems, likely replicated systemically, does.
ugh123 4y ago
Sounds like a crypto ponzi scheme
seanhunter 4y ago
> An exchange marketplace shouldn't be in this position unless they are also participating in the market directly or indirectly through funds, their own and the customers' funds. Yes, although the limitation with this line of thinking is that in most market-related activities (including running an exchange) it's hard not to be structurally long the market in various important ways. For example as an exchange your commissions are going to be highly correlated with market activity and may also be per unit in some cases and so would be directly correlated with market prices in that case. As a second-order effect, customers' trading limits are going to be affected as prices fluctuate even if you don't directly offer margin yourself, because not only does the value of the thing they've deposited with you change and therefore affect how much other stuff they can sell this for but also they may have made that deposit by pledging collateral elsewhere and borrowing against that to create margin so that margin loan will be affected. You can definitely try harder to avoid the problem than FTX though which seems to have been pretty much all-in on it's own illiquid token (FTT) and Alameda using leverage on FTT as their main source of funding. One of the things I learned at Goldman during the crisis is that you can't rely on a mark for anything illiquid - you have to have a real liquid market price.

helsinkiandrew 4y ago

They're more a brokerage than an exchange - you can buy Bitcoin and Eth leaveraged at 20-1 through their perpetual futures. Whilst these are presumably hedged - FTX are still taking on risk. https://ftx.com/markets/futures https://ftx.com/markets/futures https://help.ftx.com/hc/en-us/articles/360024780511-Futures-Specs https://help.ftx.com/hc/en-us/articles/360024780511-Futures-...