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The Great Crypto Conspiracy? Or do prop traders just do their job?

 


Alameda Research is a crypto trading firm and liquidity provider founded by crypto billionaire Sam Bankman-Fried (SBF) . Before founding his company in 2017, SBF spent three years as a trader at quantitative proprietary trading giant Jane Street Capital, specializing in equities and bonds.


In 2019, SBF launched crypto derivatives exchange FTX, which has quickly become the fifth largest exchange by open interest. The exchange is based in the Bahamas and was able to raise $400 million as of January 2022. The company is valued at $32 billion.


FTX's global derivatives exchange business is managed separately from FTX US, another SBF company, which also raised $400 million from investors including Ontario Teachers Pension and SoftBank.


The self-made billionaire has big dreams, such as taking over financial giants like Goldman Sachs . In July 2021 he already mentioned that "investors' money will very likely be used for mergers and acquisitions".


On June 18, crypto broker Voyager Digital announced that Alameda Research had agreed to provide the company with a $200 million coin ( USDC ) loan and a "revolving line of credit" worth 15,000 bitcoin ( BTC ) . grant of $319.5 million.


In an interview with NPR on June 19, SBF, Alameda Research and FTX said they "have a responsibility to seriously consider intervening to contain the contagion, even if it means a loss to ourselves."


In the interview, SBF also said its companies had "done this a number of times in the past." He loaned $120 million to then- ailing Japanese crypto exchange Liquid .


This news raises some interesting questions. More importantly, traders understand what a proprietary trading firm is and how market makers work in the crypto space.


What is a Proprietary Trading Company?

Proprietary trading means that the investment firm or investment vehicle uses its own money instead of charging commissions on client trades. Banks and financial institutions use this trading strategy to make profits and minimize risk.


Through the use of sophisticated modeling and trading software, quantitative firms use a variety of strategies to gain a competitive edge over regular traders and investors, including arbitrage, derivatives and high-frequency access to the market.


Also known as "prop trading" for short, this strategy is a popular concept in traditional finance for bonds, stocks, commodities, and debt securities.


What is liquidity provision?

Companies that provide liquidity enable trading in financial instruments by offering their own resources to allow buyers and sellers to trade with ease. Liquidity means being able to convert an asset into cash. So "liquidity provision" essentially means market making.


Market makers are regulated entities in traditional finance. Their job is to maintain a minimum level of bid and ask prices at all times so that investors have the liquidity they need when entering or exiting a market.


As a rule, this process is carried out by specialized commercial companies, but it can also be carried out independently. Official markets have lower trading fees and get cheaper funding, but anyone can arbitrage at their own expense and risk.


What does Alameda Research have to do with cryptocurrencies?

Alameda Research, Jump Trading and DRW Cumberland are among the leading prop trading firms providing liquidity for core exchanges and DeFi purposes .


These companies aim to generate profits for their respective shareholders, but sometimes that means investing in crypto assets directly and using middlemen. In short, they take a risk in order to achieve a potential longer-term gain. Risk is an essential part of liquidity provision.

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