When the new boss of FTX, John J. Ray III, told The Wall Street Journal in January that he was thinking of rebooting the disgraced cryptocurrency exchange, the comment made a splash in the industry.
Before spectacularly collapsing in November, FTX had been one of largest players in crypto, with an especially big presence in derivatives trading. So a resurrection was tantalizing – both for Ray, whose job is to maximize how much money creditors recover, and for its former customers.
But interviews with people in major trading firms that once did business at FTX raise questions about whether there’s really anything worth bringing back, possibly explaining why no public progress has been made since Ray’s ear-catching comments two months ago.
While the financial woes that ultimately wrecked FTX became clear in late 2022, these interviews with CoinDesk make clear the technical side of the exchange was weak since its inception, a thorn in the side of Ray’s revival plans. Woefully high latency, bugs in the application programming interface (API) traders use to interface with FTX and coding mishaps plagued the exchange, according to several former clients who spoke to CoinDesk.
FTX was “slow, incomplete, buggy and coded by people who had never done it before,” said Max Boonen, the founder of B2C2, one of the most active FTX market makers.
Round-trip latency on FTX – how long it took a customer to be told its trade had gone live in the exchange’s order book – was about 150 milliseconds typically and 600 to 800 milliseconds during busier periods, said Abraham Chaibi, co-founder of Dexterity Capital, another speed-sensitive former customer. (There are 1,000 milliseconds in a second.)
That’s much slower than Binance, he added, noting round-trip latency there is about 5 to 10 milliseconds.
“Propagating notifications of your fills was very slow on FTX. If you actually wanted to know promptly that your order had been filled you needed to repetitively query the state of your order” every millisecond, Chaibi said.
Speed matters quite a lot for market makers like B2C2 and Dexterity. There was good reason for them to do business there, regardless, given that so much volume took place at FTX during its glory days. But market makers are a key group of firms an exchange needs to thrive, supplying liquidity by purchasing from essentially anyone who wants to sell, and selling to those who want to buy.
Given FTX’s fall from grace, there’s a high bar to bringing it back to life. And those technical deficiencies, in the face of that, may matter more.
“In terms of latency they are by far the slowest exchange to be traded on,” said Mike van Rossum, founder and CEO of trading firm Folkvang.
Aside from slow order routing, FTX also famously went down during periods of volatility. This came to a crescendo when the Federal Reserve released a market-moving economic report on U.S. inflation in September. FTX buckled under the pressure and froze for 55 minutes as traders watched prices bounce around on other exchanges.
There were “tons of issues,” van Rossum said. “The API fell over for a few hours during high volatility. It was a very messy exchange and it was the exchange that we had most problems with.”
Firms like Folkvang stayed because FTX monopolized retail liquidity. It was easier to trade with larger size because order books were populated with the orders of a million retail customers. “FTX was loved for its features, not latency,” van Rossum added.
FTX pioneered a user-friendly collateral model that would eventually contribute to its downfall. Alameda Research’s balance sheet, as revealed by a CoinDesk report in November, was laden with illiquid altcoins Serum, Maps and FTT. This was then used as collateral on a series of loans. When the market eventually slumped, the value of those altcoins dropped to a level that meant FTX could no longer honor customer withdrawals.
The collateral feature allowed users to hold assets such as bitcoin, ether, stablecoins or even lower-market capitalization altcoins, and trade derivatives – effectively allowing traders to hold a diverse portfolio while being able to trade perpetual swap contracts that can be used to hedge or increase exposure. And while this feature was lauded by users, it was ultimately unsustainable. If FTX comes back without such features, the bugs and sluggish software could matter more.
“FTX let you withdraw cash (USD) collateralized by other coins,” Chaibi said. “For example, if you have a huge balance of FTT you could withdraw USD and FTX would treat it as a ‘loan’ with very little haircut. No other exchange lets you withdraw a negative balance like this. It is and was insane.”