These Crypto Market Makers Were Wary of FTX Before Collapse
The collapse of crypto exchange FTX has inflicted losses far and wide in the industry. The surrounding market turbulence has crypto lender BlockFi reportedly eyeing bankruptcy protection and the lending arm of Genesis Global Trading – owned by CoinDesk parent Digital Currency Group – pausing redemptions and new loans. The debacle has also stoked some pejorative aspersions of crypto as a den of heedless risk taking.
A few big trading firms saw the FTX trouble brewing and took quick action or stuck to risk-mitigation procedures to quickly reduce their exposure amid the throes of the exchange’s collapse. The takeaway might be that the nascent crypto industry does include some savvy players with long-term survival practices that could keep liquidity pools filled, providing a degree of stability during one of the largest shakeouts in the industry’s 13-year history.
Trading firm B2C2 says it turned down an FTX-related loan request. Kairon Labs pulled assets from FTX on a hunch before the exchange imploded. And Amber Group softened its exposure during the withdrawal pause.
“We didn’t really look into it too much, but withdrew 98% of our company’s assets that were on FTX as a precaution, which turned out to be a good move,” Kairon Labs co-founder and managing partner Jens Willemen told CoinDesk in a Telegram message.
FTX collapse: A market maker story
The implosion of FTX started with a CoinDesk report that fueled insolvency concerns and a withdrawn buyout offer from rival Binance and that led to a withdrawal pause. The exchange giant then filed for Chapter 11 bankruptcy protection.
The fallout put a spotlight on a key crypto entity known as the market maker – essentially trading firms that use their own capital to make bets on tokens and take the other side of trades on exchanges when other players are trying to get in or out quickly.
FTX founder Sam Bankman-Fried himself has roots in the business: He got his start at Jane Street, a quantitative trading firm and liquidity provider that has a foothold in the crypto industry. He then founded Alameda Research, the trading firm and major market maker that triggered the liquidity crisis.
Early warning signs
B2C2, which announced a CEO change on Friday and offered to purchase loans from Genesis’ books on Wednesday, was approached by FTX sister firm Alameda Research for lending earlier this year, according to a source familiar with the matter. B2C2 declined the offer for unspecified reasons.
B2C2 co-founder and director Max Boonen recently tweeted that he suspected Alameda Research was behind an attempted attack in 2019 on exchange Binance’s then-new futures platform. Binance had a data leak that year that revealed customers' private orders, which the attacker used to set up a strategy of selling large quantities while simultaneously placing bids 30% below.
Boonen alleges now that he suspected then the attacker was Alameda, linked to supporting data, and said that was why he avoided working with the firm over the years.
Alameda didn't immediately respond to a request for comment.
B2C2 didn’t have direct exposure to FTX’s native FTT token or Alameda at the time of the collapse, but had up to $9 million in assets on FTX as a “secondary trading venue,” said a spokesperson – an amount within B2C2’s “established single-exchange risk tolerance” and small enough to have no meaningful impact on operations.
Belgium-based market maker Kairon Labs heard about a month ago that FTX/Alameda was “secretly blowing up,” Willemen told CoinDesk. The information came to the firm from a close contact at a top Asian exchange. Despite not having concrete evidence, Kairon Labs decided to act.
Willemen declined to provide a specific figure, but confirmed the amount Kairon Labs pulled from FTX was in the seven figures.
Amber Group, another market maker, tweeted on Nov. 9 that the firm had no exposure to Alameda Research or FTX’s native FTT token, but had been an active participant on the exchange.
“While we have significantly reduced our exposure over the course of the week, we still have withdrawals that have yet to be processed,” the firm wrote at the time of the withdrawal pause, noting that the stuck assets represented less than 10% of Amber Group’s total trading capital.
Trading firm Wintermute tweeted Nov. 9 that it had reduced its exposure to FTX after the insolvency concerns started. During the withdrawal pause, some of its funds were stuck, but the amount was “within our risk tolerances and does not have a significant impact on our overall financial position,” Wintermute said.
Two days later, Wintermute said it had stopped trading and market-making operations and moved all of its assets from FTX US, a separate legal entity from the main FTX exchange.
The most recent update came from Cumberland, one of the earliest and longest-standing crypto market makers, which disclosed last week that it had less than $10 million in FTX exposure and no exposure to Alameda. The firm tweeted on Wednesday that its team was working “24/7 to provide liquidity and we are actively quoting across the market.”