Alameda Research has been allowed to go beyond normal borrowing limits on the FTX exchange since its early days, Sam Bankman-Fried said, in a concession that illustrates how the former billionaire trading shop enjoyed preferential treatment on customers years before the 2022 cryptocurrency crisis.
In an interview with the Financial Times, the 30-year-old described the huge role Alameda played in launching the exchange in 2019 and how it was able to reach exceptionally high levels of borrowing from FTX from the start.
Bankman-Fried said that “when I first started FTX,” Alameda had “fairly large limits” on its borrowing from the exchange, but he “quite” wished he held the trading firm to the same standards as other clients.
When asked if Alameda continued to impose greater limits than other customers, he said, “I think that may be true.” He did not specify the size of Alameda’s borders, which are larger than those of other clients.
FTX and Alameda have publicly portrayed themselves as distinct entities to avoid the perception of a conflict of interest between the exchange, which processed billions of dollars in client deals a month before its collapse, and the proprietary trading firm Bankman-Fried.
Bankman-Fried’s comments highlighted a longstanding special treatment for Alameda. The close ties between the companies and the large amount of borrowing by Alameda from FTX played a major role in the stunning collapse of the exchange, once one of the largest cryptocurrencies 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, has apologized for mistakes that left 1 million creditors facing huge losses on funds entrusted to FTX, but denied intentionally misusing clients’ assets.
Bankman-Fried said Alameda’s large borrowing limits originated as a result of the department store’s early role as a major liquidity provider for FTX before it attracted other financial groups.
FTX, like other large offshore trading venues, dealt large amounts of derivatives which allowed traders to inflate their bets using borrowed money – but professional firms are usually required to make the market run smoothly.
“If you go back to 2019 when FTX first started, at that point Alameda was 45 percent of the volume or something on the platform,” Bankman-Fried said. “It was basically a situation where if the Alameda account ran out of ability to take new positions that would create risk issues for the platform because we didn’t have enough liquidity providers. I think it has fairly large limits because of that.”
By this year, he said, Alameda accounted for about 2 percent of trading volume and was no longer the exchange’s main liquidity provider. Bankman-Fried said it regretted not reviewing the company’s trading transaction to ensure it was subject to the same borrowing restrictions as other similar companies operating on the exchange.
FTX has lent traders so that they can make large cryptocurrency bets with a small initial outlay, known as margin trading. Alameda’s significant FTX exposure was a major reason that weakness in the trading company’s balance sheet caused a financial crisis that engulfed both companies.
Bankman-Fried estimated Alameda’s liabilities to FTX at nearly $10 billion by the time the two companies filed for bankruptcy in November.
In terms of volume, in terms of revenue, in terms of liquidity, the stock exchange was virtually independent of Alameda. Obviously, this was not true in terms of the positions or the balances of the place.
John Ray, the veteran insolvency practitioner who manages FTX in bankruptcy, criticized its previous leadership for failing to keep Alameda and FTX separate. In the court filings, he noted “a confidential exemption for Alameda from certain aspects of FTX.com’s auto-liquidation protocol.”
Automatic liquidation, or closing out of tense positions, has been a core tenet of FTX’s risk management procedures and a key part of its proposals to change parts of US financial regulation. When a typical client trade started to crash, the FTX liquidation mechanism was supposed to start draining the account margin to protect the place from one trade causing a loss on the exchange.
However, Bankman Fried said there “may have been a liquidation delay” for Alameda and possibly other large dealers. He said he was “unsure” whether Alameda was subject to the same liquidation protocol as other traders on the exchange, and that the trading firm’s account transaction was “in flux.”
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