Alameda Research was allowed to exceed normal borrowing limits on the FTX exchange from early days, in a concession that shows how the former billionaire’s trading shop received preferential treatment for clients years before the 2022 crypto crisis, Sam Bankman-Fried said.
In an interview with the Financial Times, the 30-year-old explained the major role Alameda played in the launch of the exchange in 2019 and how it was able to borrow at a very high level from the FTX from the start.
Bankman-Fried said that Alameda had “pretty big restrictions” on borrowing from the exchange when FTX first launched, but she “absolutely” wanted to hold the trading firm to the same standards as other clients.
When asked if Alameda had greater restrictions than other customers, he said: “I think that might be true.” He did not specify how much larger Alameda’s limits are than other customers’ limits.
A month before the collapse, FTX and Alameda publicly presented themselves as separate entities to avoid a conflict of interest between the exchange, which processes billions of dollars of client trades, and Bankman-Fried’s private trading firm.
Bankman-Fried’s comments highlight a longstanding special relationship for Alameda. Close ties between the firms and Alameda’s heavy borrowing from FTX played a key role in the spectacular collapse of the exchange, once one of the largest cryptocurrency spaces and valued at $32 billion by investors including Sequoia and BlackRock.
Bankman-Fried, formerly one of the most respected figures in the digital asset industry, apologized for the mistakes that left 1 million lenders with huge losses on the funds they entrusted to FTX, but denied any intentional misuse of client assets.
Bankman-Fried said the origin of the large debt limits for Alameda was a result of the trading store’s early role as a primary liquidity provider at FTX before it brought in other financial groups.
FTX, like other major offshore trading venues, operated large volumes of derivatives that allowed traders to increase their bets using borrowed funds, but professional firms were usually needed to keep the market running smoothly.
“If you go back to 2019 when FTX first launched, then Alameda had 45 percent of the volume on the platform or something,” Bankman-Fried said. “It was basically a situation where if the Alameda account ran out of capacity to take new positions, it would cause risk issues for the platform because we didn’t have enough liquidity providers. I think that’s why there were quite big restrictions.”
Alameda accounted for about 2 percent of trading volume this year and was no longer the main liquidity provider on the exchange, he said. Bankman-Fried said it regretted not revising the trading firm’s treatment to ensure it was subject to the same borrowing limits as other similar listed firms.
FTX is slow for traders to make big bets on cryptocurrency with a small initial cost known as margin trading. FTX’s large exposure to Alameda was the main reason why weakness in the trading firm’s balance sheet led to the financial crisis that engulfed both companies.
Bankman-Fried estimated Alameda’s liabilities to FTX at about $10 billion when both companies filed for bankruptcy in November.
“From a volume, revenue, liquidity standpoint, the exchange was effectively independent of Alameda. Obviously, it didn’t come out right in terms of positions or balances in the space,” Bankman-Fried said.
Veteran bankruptcy attorney John Ray, who ran FTX in bankruptcy, criticized his former management for failing to keep Alameda and FTX separate. In court filings, he pointed to Alameda’s “discreet exemption from certain aspects of FTX.com’s automatic takedown protocol.”
Automatic liquidation or closing of short positions was a key principle of the FTC’s risk management procedures and a key part of proposals to change parts of US financial regulation. When a typical client’s trade begins to flood, FTX’s liquidation mechanism is designed to begin draining the account’s margin to protect the venue from a loss-making trade.
However, Bankman-Fried said “there may be a delay in liquidation” for Alameda and possibly other large traders. He said he was “not sure” whether Alameda was subject to the same cancellation protocol as other traders on the exchange and that the relationship was “in progress” at the trading firm’s account.
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