“According to SBF, the benefits we gain by acting quickly outweigh the costs we occasionally pay due to missed risk checks, hacks, etc. This is SBF’s working philosophy, and it drives the corporate culture of Alameda and FTX.”
Written by: Adi, former employee of Alameda Research
Compiled by: Luffy: Foresight News
Alameda Research once caused a global response with a story about a "fat finger" trade that caused a short-term market crash, but the public did not know the truth behind it at the time. (Translator's note: Fat finger refers to the phenomenon that traders may press the wrong key in the fast-moving electronic financial market where traders must operate quickly and the high intensity of work and huge pressure make it possible for traders to press the wrong key.)
This happened to me a few weeks after I joined Alameda. I had just gotten a handle on the company’s engineering workflow and was beginning to understand the trading system. At a high level, trading at Alameda operated in two modes:
The main one is our semi-systematic strategies, where traders set model parameters to control a complex automated trading system. This way, the trader does not make actual trades, but rather fine-tunes the algorithm that determines how to execute these trades at a high frequency.
However, every once in a while, traders will need to execute trades manually. Often, manual action may be necessary if our automated trading system fails due to market volatility or if there is an arbitrage opportunity where we have not yet set up automated trading.
Our automated trading systems handle the vast majority of trades at Alameda. As such, we perform sanity checks to ensure that orders sent are reasonable relative to current market prices. This is not the case with manual trading, which is discretionary in nature.
The tricky thing about risk is that it’s often invisible until it pops up and bites you in the ass.
Well, on October 21, 2021, an Alameda trader’s hand slipped.
The trader tried to sell a batch of BTC based on the news and placed the order through our manual trading system. They moved the decimal point wrong by a few places and instead of selling the Bitcoin at the current market price, they sold it at a cheaper price.
The results were immediate. The price of Bitcoin plummeted from a high of $65,000 to a low of $8,000 on some trading venues, but was quickly recovered by arbitrageurs.
The sudden price action ignited discussion on Crypto Twitter as traders scrambled to figure out what exactly was happening:
News outlets also began picking up on the story. Binance US, one of the main venues for the flash crash, released a statement claiming it was caused by one of their “institutional traders” whose “trading algorithm was flawed.”
I guess Caroline called them.
Alameda’s losses on the “Fat Finger” trade were staggering tens of millions of dollars. But because it was an honest mistake, nothing was done other than implementing additional sanity checks on manual trades.
This is generally how things work at Alameda, we wait until something breaks, then rush to fix it. That's why it took us so long to implement sanity checks, any "traditional" trading firm would never start trading without doing this.
After that, everything went back to normal. According to SBF, the benefits we gained by acting quickly outweighed the costs we occasionally incurred due to missed risk checks, hacks, etc. This is SBF’s working philosophy, and it drives the corporate culture he has created at Alameda and FTX.
For nearly two years, the Bitcoin flash crash has remained a mystery to the public. Now you know who was responsible and what happened behind the scenes.
