BitMEX, a well-known derivatives exchange, offers insight into the ongoing debate around proprietary trading on crypto exchanges. Stephan Lutz, acting CEO of BitMEX parent company, 100x Group, believes that exchanges that generate profits from exclusive trades should no longer rely on teams of internal market makers. Lutz suggests that a critical mass of High Frequency Traders (HFT) and buffer stores in the market can effectively fulfill the role of a liquidity provider. This statement comes in light of recent concerns about a potential conflict of interest related to internal proprietary trading at Singapore-based Crypto.com.
DeFi Cake Transition as Example:
Lutz pointed out that Cake DeFi, another successful crypto exchange, has shown a natural transition from relying on in-house traders. As the crypto market matures and more institutional liquidity providers emerge, Cake DeFi has phased out its internal market creation division. Instead, the company focuses 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 History:
BitMEX has changed, reducing its internal market making activity in recent years. During its peak, BitMEX dominated the crypto futures market but faced accusations of trading against its customers. However, Lutz confirmed that BitMEX’s trading desk was always segregated and stated that Arrakis Capital operated as a designated market maker. The changing landscape and regulatory pressures have driven some market makers to move offshore.
Red Flags and Differentiating Factors:
Lutz outlines several factors for differentiating between a docile internal trading team and an operation similar to Alameda Research. Key considerations include segregation of client funds and house funds, access to client data for front-running, and the ability to move the market on the exchange itself. Additionally, fee structure and economic interests play a role in determining the nature of an internal trading team.
The debate around proprietary trading on crypto exchanges continues to grow. BitMEX’s Lutz points out that the growth of the market and the presence of well-established liquidity providers makes it less necessary to have a team of in-house market makers. As the industry matures, exchanges like Cake DeFi represent a transition towards a segregated treasury table, while maintaining transparency and adhering to best practices. A clear distinction must be made between traditional treasury functions and internal teams who may have a conflict of interest or engage in questionable practices.