Prop traders are fulfilling their responsibilities despite the prevalence of crypto conspiracy claims.
What is the role of market makers? Sam Bankman-Fried, the founder of FTX and Alameda Ventures, recently made headlines for rescuing a few CeFi cryptocurrency platforms. Despite the prevalence of crypto conspiracy claims, prop traders are simply carrying out their duties.
Sam Bankman-Fried, a billionaire in the bitcoin industry, established the exchange and liquidity provider Alameda Research (SBF). Before starting his own business in 2017, SBF spent three years as a trader for Jane Street Capital, a leading quantitative proprietary trading firm specializing in bonds and stocks.
In 2019, SBF founded the cryptocurrency derivatives and exchange FTX, which has quickly risen to become the fifth-largest platform by open interest. In January 2022, the Bahamas-based exchange, valued at $32 billion, raised $400 million.
FTX US, another business owned by SBF, secured an additional $400 million from investors, including the Ontario Teachers Pension and SoftBank. This segment is separate from the company’s global derivatives exchange division.
With ambitious goals, the self-made millionaire aims to acquire financial giants like Goldman Sachs. In July 2021, he stated that the funds raised from investors would most likely be used for mergers and acquisitions. On June 18, cryptocurrency brokerage Voyager Digital announced two loans: a $200 million USDC loan and a “revolving line of credit” of 15,000 BTC valued at $319.5 million at the time.
During an interview with NPR, SBF emphasized the responsibility of Alameda Research and FTX to step in and intervene, even if it meant incurring losses, to prevent further harm. He mentioned that his companies had done this on several occasions, including lending $120 million to the Japanese cryptocurrency exchange Liquid when it faced financial difficulties. This raises interesting questions about the role of market makers in the cryptocurrency sector and the functions of proprietary trading firms.
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What is a proprietary trading firm?
A proprietary trading firm refers to an exchange where the investment entity or vehicle uses its own funds rather than relying on commissions from customer trades. Banks and other financial institutions can benefit from this trading strategy by reducing risk on their balance sheets.
Quantitative firms employ sophisticated models and trading algorithms to outperform traditional traders and investors. Strategies such as arbitrage, derivatives, and high-frequency trading are utilized.
Prop traders, also known as prop trading, engage in this activity in traditional finance, involving bonds, stocks, commodities, and financial instruments.
What is liquidity provision?
Liquidity providers enable the trading of financial products between buyers and sellers by making their own resources available. Market-making is often associated with the term “liquidity provision” since liquidity refers to the ability to convert an asset into cash.
In traditional finance, market makers are regulated entities. They are required to provide minimum bid and ask quotes to ensure sufficient liquidity for investors to enter or exit a market.
Specialized trading firms typically handle this activity, although it can also be done independently. Prop traders can engage in arbitrage trading at their own expense and risk. Official exchanges have access to cheaper financing and trading fees.
What role does crypto play in Alameda Research?
Alameda Research, along with Jump Trading and DRW Cumberland, is one of the top prop trading firms that provide liquidity to prop traders in centralized exchanges and decentralized finance (DeFi).
These firms occasionally expose their clients directly to cryptocurrency assets and intermediaries to generate revenue for their diverse owners. Risk is a fundamental aspect of liquidity provision, as they take on risk in exchange for potential rewards.