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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 exch

by adrr 4y ago

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.

jack_pp 4y ago
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.
- rjzzleep 4y ago
  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.
bboygravity 4y ago
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?).
megablast 4y ago
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.
papito 4y ago
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".
- omarfarooq 4y ago
  Kimchi premium was arbed away.
meltedcapacitor 4y ago
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.
- silasdavis 4y ago
  How is information on order books non public? Usually crypto order books are public APIs.
  - PeterisP 4y ago
    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.
    - anonymoushn 4y ago
      Alameda was in general deeply incompetent. Front running your customers is not all that doable if you insist on using python.
      - kasey_junk 4y ago
        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.
phire 4y ago
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?)
drexlspivey 4y ago
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.
- anonymoushn 4y ago
  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
hackerlight 4y ago
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.

by adrr 4y ago

jack_pp 4y ago

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.

rjzzleep 4y ago
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.

bboygravity 4y ago

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?).

megablast 4y ago

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.

papito 4y ago

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".

omarfarooq 4y ago
Kimchi premium was arbed away.

meltedcapacitor 4y ago

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.

silasdavis 4y ago
How is information on order books non public? Usually crypto order books are public APIs.
- PeterisP 4y ago
  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.
  - anonymoushn 4y ago
    Alameda was in general deeply incompetent. Front running your customers is not all that doable if you insist on using python.
    - kasey_junk 4y ago
      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.

phire 4y ago

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?)

drexlspivey 4y ago

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.

anonymoushn 4y ago
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

hackerlight 4y ago

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.