BitMEX, a well-known derivatives exchange, offers insights into the ongoing debate surrounding proprietary trading at crypto exchanges. Stephan Lutz, acting CEO of BitMEX’s parent company, 100x Group, believes that exchanges generating profits from proprietary trading should no longer rely on internal market-making teams. Lutz suggests that the critical mass of High-Frequency Traders (HFTs) and prop shops in the market can effectively fulfill the role of liquidity providers. These remarks come in light of recent concerns about potential conflicts of interest related to internal proprietary trading at Singapore-based Crypto.com.
Cake DeFi’s Transition as an Example:
Lutz points out that Cake DeFi, another successful crypto exchange, has demonstrated a natural transition away from relying on internal traders. As the crypto market matures and more institutional liquidity providers emerge, Cake DeFi has phased out its internal market-making division. Instead, the company has focused on maintaining a separate treasury desk called Arrakis Capital, which performs limited functions such as converting commission fees, hedging exposure, and providing liquidity for the platform’s token, BMEX.
Lessons from BitMEX’s History:
BitMEX has transformed, scaling back its internal market-making activities in recent years. During its peak, BitMEX dominated the crypto futures market but faced allegations of trading against its customers. Lutz, however, affirms that BitMEX’s trading desk was always segregated and maintains that Arrakis Capital operated as a designated market maker. The changing landscape and regulatory pressures have prompted some market-making firms to relocate offshore.
Red Flags and Differentiating Factors:
Lutz outlines several factors to distinguish between benign internal trading teams and operations similar to Alameda Research. Key considerations include the separation of client funds and house funds, access to client data for front-running, and the ability to move markets on one’s own exchange. Furthermore, fee structures and economic interests play a role in determining the nature of internal trading teams.
The debate surrounding proprietary trading at crypto exchanges continues to evolve. BitMEX’s Lutz suggests that the market’s growth and the presence of established liquidity providers make internal market-making teams less necessary. As the industry matures, exchanges like Cake DeFi demonstrate a transition towards separate treasury desks, while maintaining transparency and adhering to best practices. A clear distinction must be drawn between traditional treasury functions and internal teams that may have conflicting interests or engage in questionable practices.
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