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HomeMarketFTX 'Hard Coded' Secret Trading Advantages for SBF's Hedge Fund, Officials Say

FTX ‘Hard Coded’ Secret Trading Advantages for SBF’s Hedge Fund, Officials Say

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New details about the relationship between the crypto exchange FTX and its affiliated trading firm Alameda Research—unveiled in a Commodity Futures Trading Commission complaint this week—highlight the lack of controls between the two firms that left customer funds vulnerable. 

According to the CFTC complaint, FTX allegedly exempted Alameda from risk management controls that normally halt trading when funds aren’t available and force firms to liquidate positions if funds fall into a negative balance.

Alameda, the complaint alleges, could also make trades several milliseconds faster than other FTX customers. “These advantages were programmed into the code for FTX Trading at the direction of Bankman-Fried,” the complaint said, referring to FTX’s founder and former CEO Sam Bankman-Fried.

While news outlets reported last month that Alameda was borrowing customer funds to fuel risky bets before the company filed for bankruptcy, the CFTC allegations show just how problematic the relationship was between the two firms, according to market structure and crypto experts. 

On Tuesday, in addition to the CFTC complaint, the SEC filed a parallel civil complaint and prosecutors from the Southern District of New York unsealed an eight-count criminal indictment against Bankman-Fried alleging wire fraud and multiple counts of conspiracy on Tuesday.

For any derivatives exchange, risk management controls are critical, said Omid Malekan, a professor at Columbia Business School who has written several books about the crypto industry. 

“It is breaking every rule of how you run a safe derivatives exchange,” Malekan said. “The fact that you would have any kind of derivative exchange hard code in that one of their biggest users is exempt from basic risk management is astonishing.” 

A representative for Bankman-Fried did not immediately return a request for comment.

In traditional derivative exchanges that are part of the U.S. equity market, the exchange is separate from the broker, which acts as a check on the system for its clients. An exchange cannot have a relationship with a broker. But in the unregulated area of crypto, FTX wasn’t prevented from acting as both the exchange and the broker for clients. 

“If you’re going to have this more vertically integrated model, you need to have really pristine risk management, because there are more things that can go catastrophically wrong,” Malekan said.

The complaint said that Alameda could also directly access the FTX platform to make trades, instead of relying on a customer-facing website or mobile app, giving them a time advantage of several milliseconds. “In the high-frequency trading sector, this is a significant time advantage,” the complaint said. 

Larry Tabb, the head of market structure research at Bloomberg Intelligence and former founder and CEO of TABB Group told Barron’s “that would never happen in the U.S. equity market because the exchanges manage this.” He added, “clients don’t want to be in an uneven relationship compared to others and they would know whether they’re being boxed out or not.” 

Tabb said the FTX-Alameda relationship highlights the need for increased regulation. “There are going to be five or six rules that need to get implemented in crypto before institutions will actually trust this market.”

Write to Rosalind Adams at


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