Dialogue Wintermute: 3AC brought it upon themselves, SBF should have given up Alameda to focus on FTX

Interviewee: Yoann Turpin @Wintermute Co-founder

Interview: BlockBeats

Compilation: gm @BlockBeats

Whether in traditional financial markets or the crypto market, liquidity is the lifeline of all trading markets, and market makers play a crucial role in this.

In short, market making involves providing two-sided quotes to any given market, offering market depth for both buyers and sellers; market making strategies are a method of placing limit buy and sell orders, utilizing the fluctuations in the underlying price to trigger these limit orders, and profiting from the spread between the buy and sell orders. Without market makers, the market would be relatively illiquid, which would hinder the ease of trading.

After the FTX incident, with the disappearance of one of the leading market makers, Alameda, liquidity in the crypto market has significantly decreased. Other market makers, including Genesis, Amber Group, and Wintermute, have also suffered substantial losses due to the collapse of FTX, further widening this liquidity gap. This comes less than six months after the downfall of another leading market maker, 3AC, casting a shadow over the crypto market and making market making increasingly difficult.

However, in a recent report by Forbes, Wintermute stated that although $59 million is locked in FTX, its overall financial condition remains good. Additionally, 3AC, which was also a market maker for FTX like Wintermute, once revealed that the reason for its collapse was that FTX/Alameda hunted its positions.

So what is the truth? How does Wintermute view the FTX collapse and the revelations from 3AC? BlockBeats interviewed Wintermute on these related issues, and the content is compiled as follows:

BlockBeats: Could you briefly introduce Wintermute and its relationship with FTX/Alameda? Was Wintermute affected by the FTX incident?

Wintermute: We are one of the largest market makers for spot and derivatives cryptocurrencies, and we also provide over-the-counter trading. Wintermute is a client of FTX and a competitor of Alameda.

BlockBeats: How do you view the FTX collapse? Will it set the entire industry back several years?

Wintermute: The FTX incident may last for a few months, but not for years. It is a large trading platform, one of 500 cryptocurrency exchanges. However, we believe that the collapse of 3AC will have a greater destructive impact on the entire industry because it undermined trust in the entire lending sector.

BlockBeats: What is your view on the relationship between FTX and Alameda? Was there insider trading by Alameda on FTX?

Wintermute: It is certain that Alameda provided liquidity on FTX, and Alameda initially may have had a very high market share on that exchange. This is fine in itself, but if market making becomes unprofitable, independent market makers generally stop providing liquidity, but Alameda cannot.

We have no information regarding insider trading. Even though we compete with Alameda, our team has not found any bad trades.

BlockBeats: Previously, Zhu Su publicly stated, "It was FTX/Alameda that hunted their positions, ultimately leading to their loss of all funds from themselves and LP/creditors. During the Luna collapse, due to Alameda's non-liquidation privileges on FTX, a sell-off that saw a drop of up to 99% over three consecutive days caused significant losses to 3AC." Do you agree with this statement, or does he want to shift the blame for 3AC's collapse onto FTX to pave the way for launching a new fund in Dubai?

Wintermute: We have not seen anything to support that statement. Even so, it does not help rebuild the trust they lost when lying to creditors. However, in the case that these positions may have been "hunted," 3AC's strategy was clearly not flexible enough. Generally, funds with strict risk monitoring would stress-test their strategies, but they seem not to have done so.

From my experience as a former trader, it is a very poor performance if a trained trader blames their losses on others.

BlockBeats: Assuming it was indeed Alameda that caused 3AC's massive losses, how did Alameda operate during a one-sided market like the Luna collapse?

Wintermute: Allegedly, Alameda lost money on Luna, which is also part of the reason for 3AC's collapse. Regarding Alameda's strategy, it seems that Alameda shifted from a diversified strategy (spot and futures…) to directional betting around the end of 2020 to 2021, which explains their significant gains in early 2021 but likely also became a potential factor for their downfall.

BlockBeats: As one of FTX's former major market makers, did Wintermute encounter the situation described by Zhu Su?

Wintermute: No.

BlockBeats: A trading platform typically has several market makers. Are these market makers in a cooperative or competitive relationship? How do they provide market making under different market conditions, and what risks do they face?

Wintermute: We have friendly and constructive relationships with other legitimate market makers, but it is a competitive environment both inside and outside trading platforms. We all compete to offer the best prices for people to trade based on our quotes, rather than primarily competing against each other.

However, no market maker aims for a 100% market share; most peak at around 25-40%, and market makers enjoy competition because it aids price discovery.

BlockBeats: Recently, Genesis and DCG have also faced liquidity tightening. Do you think they will eventually declare bankruptcy? If so, what impact will that have on the industry?

Wintermute: It seems they are indeed facing a critical challenge, and the impact could be significant, as products like GBTC are part of many U.S. pension funds.

BlockBeats: Which CeFi institutions do you think are still operating under high leverage and high risk?

Wintermute: I don't want to speculate, but it seems the risks are not over yet.

BlockBeats: The FTX incident has also attracted regulatory attention. Do you think the crypto industry will face comprehensive regulation next year? What advice do you have for practitioners?

Wintermute: We will continue to assess the policy situation. Although FTX was regulated, it did not prevent its collapse. Practitioners should hire excellent regulatory advisors to understand how this will affect their business.

BlockBeats: From building a $32 billion crypto empire to a sudden collapse in just two or three days, how do you evaluate SBF? Based on this incident or its impact on the entire industry.

Wintermute: He may have initially had good intentions, but he is at least a very poor trader: once Alameda went bankrupt, he should have let go and focused on FTX. FTX had a rich product lineup and seemed to have found the right balance between innovation and regulation. Given the current state of governance in the crypto space and their disregard for user assets, it is clear that he should no longer be an operator of a trading platform.