Crypto Quant Trading Firm Trading Billions w

what's going on guys welcome back to the coinest podcast the conversations that you can't miss as a crypto asset investor today's episode today's show that you're about to listen to or if you're watching here on youtube this is one of those episodes that lives up to that motto and gives you access and perspective that i really don't think you can get anywhere else this was so much fun to record it's the longest episode i've recorded and i spoke with sam who's the ceo of alameda research they are a crypto quant trading firm i talk about what that means if your head's spinning and you're saying what's what's a quant trading firm we look at the difference of that and a market maker and a liquidity provider all those words kind of get tossed around into one we break that that down pretty simply uh we start off with uh sam's twitter account was recently hacked and the hacker trying to convince me to send him some bitcoin as we were setting up the podcast obviously i wasn't talking to sam i was talking to the hacker and then we look at sam's background how alameda research started recently they live traded a massive like a hundred million dollar trade and it was posted on twitter so i wanted to understand what the strategy was there why a firm like alameda was making some of that stuff public i think it's fascinating what they're doing in terms of giving people that kind of access we also look at alameda and they hold uh two of the top ten positions on the bitmex notional leaderboard which means that they've done around 60 to 70 million dollars of profit on that exchange so that's also another fascinating one especially for the traders we look at how you can remain market neutral and also be having those kind of results and and what they're allowed to do there and he also dives into it into some of the specifics with their strategy that one is fascinating and then at the end we also look at ftx which is an exchange they're launching um which allows traders to do new things that aren't available in the crypto market yet indices and indexes of the entire altcoin market is something that people talk about a lot whether alts are going up or alts are going down but right now there's no way to really trade it right indexes in crypto don't really exist yet what's the correct benchmark how do you create that and the problems in creating those uh ftx is creating some of those contracts i think it's a fascinating discussion in terms of also they're creating leveraged erc20s there's so much stuff we talked about i'm not going to be able to cover it all strap in i hope you guys enjoy this one it is a long one but it's it's um packed full of value like i said and i appreciate sam for giving everyone and myself the access um before we start the show i do have one quick message from the lead sponsor who makes this show possible and that's buy bit exchange i told you guys last week that they were letting me do a very cool promotion as a way to thank you everyone 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that you actually are enjoying these shows so appreciate it guys let's get into it don't waste any more time enjoy the show all right well it should be live uh sam thanks for joining me welcome to the coins podcast thanks for coming on man thanks for having me of course of course before we get into everything i want to talk about with alameda with ftx with so many topics i think this honestly has like the potential to be the podcast of the year that i've recorded just because not enough people are talking about your firm the exchange everything that's going on but also because i was actually talking to you about setting up this podcast and i was talking with andrew my my friend who is helping set this up and uh your twitter was hacked what happened there in the past 24 hours how did you guys uh what happened there yeah so uh basic answer is that uh there is uh uh there is someone who's been sim swapping people in crypto this happened with origin x a few months ago um we don't use you know partially for this reason uh we don't use sms uh two-factor authentication for anything you know uh related to any of our businesses um i had a couple uh honey pots lying around uh this is one of them another was a two-year deprecated store of two-factor authentication codes that are no longer in use um and uh you know they've been targeting a lot of the larger firms in crypto um it turns out that it's basically trivial to sim swap a us number uh you just call up you know the mobile carrier and say hey you know my name is and they you don't give your name you give someone else's name you say you lost your phone and then you get their number yeah um so uh so uh yeah since 12. numbers we uh recovered it a couple hours later um and uh the damage dealt was that they posted bitcoin going to 20k on that twitter account yeah it was it was i was like i was a little bit dumbfounded i was like well we're set to have this conversation later i was like i talked and everything's good and we're we're also talking on twitter and then like an hour later i tried to confirm the time with you and he said yeah that's okay by the way can you send me some bitcoin i was like okay something's not right here it's like things aren't adding up so i was almost uh i was almost caught but i was yeah and then and they told me he's getting me next so if if if the sim swapper is listening um yeah all right well done stay on your toes yeah and just don't use phone 2fa for uh for pretty much anything twitter is a tricky one they they do it by default yeah in that all you need to reset it is a text message so yeah well i'm glad i'm glad i'm talking to the real sam today and not not not whoever i was who whoever i was chatting with yesterday um but this should be this should be really yeah go ahead yeah oh i just said one sort of humorous thing got a message from them in the end um saying hey uh if this uh hack had worked we would have gotten a lot from you so can you please give us a couple bitcoins as a consolation prize um we did not give them the consolation prize yeah that's it's hilarious that's how the conversation ended with me i said you know i said i'm not actually gonna send any bitcoin i i think uh sam's account is compromised and he said okay well you know i'll send you can send me bitcoin or whatever else we're gonna come after you and i said okay and just like let it go it's uh it was a funny conversation i was like well this is a weird this is weird i don't think sam was talking to me like this but anyways let's let's get to the good stuff i'm glad to be talking to you and not not the hacker that that happens in crypto i guess it's a good lesson for all the listeners out there where did alameda come from because i saw them get retweet you guys got retweeted i think it was a video actually of you and you were trading some 7 000 uh bitcoin cell that came through on binance and yeah and it was honestly the first time you know on a lot of people's timelines you see uh you know a chart or some person trading or some person giving this uh you know 100 000 price target but it was kind of the first time where you saw a hedge fund or a quant firm or a market maker whatever it was giving a real behind the scenes access of what's happening so where did alameda come from what were you doing before this i guess i should start with yeah at jane street and we'll go from there yeah so uh i know i i guess starting at college as a physics major at mit i sort of realized halfway through college i kind of didn't want to do physics and didn't really know what the i wanted to do with my life um you know had this sort of uh mid mid-college crisis or whatever you want to call it um i'd had some friends who had interned at jane street and i'd liked it um and i started separately thinking that uh you know i wanted to figure out how i could sort of have as much impact you know as possible with my life and that you know uh finding a way to be able to donate a lot of money seemed like a pretty plausible path um so kind of put those together uh interned at jane street liked it and then started full-time uh after i graduated um so as i was there for about three years trading etfs um and uh you know just doing sort of quantitative trading um in a group there um and then you know sometime in 2017 uh left jane street uh and kind of took a look at at crypto it seemed pretty insane um you know just from the perspective of like a ton of customer demand a booming industry and the infrastructure and the liquidity was just not very good which kind of seems like there's a pretty good opportunity to jump in there sure so i i asked this almost exact same question to arthur uh arthur hayes ceo of bit max for everyone listening and i'm familiar and um i think he was working with uh was it deutsche bank i'm not sure that the bank yeah it was deutsche or someone else and um the opportunity for him was he saw really quick well i can make money in this someone right now is is kind of quoting futures and i can almost make ten percent per annum the spread is kind of ridiculous was it more of you saw it was inefficient or when you looked at it you said okay this is like a totally new asset class that i think has massive potential based on what's actually going on here or was it kind of just like the quant mind of this is a new asset i can kind of gobble those inefficiencies and make money i think kind of the the very first thing that struck me was just how inefficient it was sure um and i guess i wasn't sure if that was true more was i looked at some data and the day looked really inefficient but i can't thought maybe it was fake it's sort of implausibly inefficient yeah and uh and then sort of sort of stuff too was like okay like if this is real there's some pretty big opportunities here for for you know liquidity fighting uh arbitrage things like that um and so i sort of started digging deeper um and really the only way to dig deeper is to try it out like you're never really gonna know if you can do a trade until you try doing it um and uh you know so i started kind of playing around with it late 2017 and uh you know decided a lot of the data was kind of fake but some of it was real and enough of it was real that there really were some pretty uh pretty exceptional opportunities so you know late 2017 i was sort of scrambling to get crypto accounts together you know i noticed some large arbitrage between bitrax and poloniex but i'd have you know two thousand dollars of withdrawal limits a day on polonia so i'd be like great just made 30 bucks uh what next um and and just ran into a you know a large number of those problems where you know i'm like holy this is like an opportunity to make a million dollars and instead you make a thousand you're like why is that well you know i didn't have a kyc didn't count on this exchange or like my withdrawal limits were too slow or like and my bank account refused to wire to this exchange or you know and sort of the deeper dive into crypto than where you realize there's just a ton of this where like you know coming from normal finance i'm used to like nah you buy apple on nicey you sell on nasdaq and you made money and it just it is exactly what it looks like and then you go to crypto and you're like oh wow it's like an entire new business area to get a good account on this exchange yep was were you already on your way out of jane street or what what prompted the switch yeah so i was already out of jane street when i started this um and i think there are a lot of things coming together um i think that like one of them was there were a lot of things i wanted to try with my life and i you know i sort of felt like it was now or never um i really liked my time there they're really good to me i have sort of no grapes uh about them at all um and i'm really grateful uh for uh you know for my time there um i think that like you know i'd always kind of wanted to try starting something um and and i had a lot of ideas of things i want to do with my life you know everything from like uh working at a charity to trying politics to a bunch of other things and uh and and you know it seemed like maybe one of those was gonna end up pretty exciting and i was never gonna know unless i tried exactly that uh that's probably a similar story for a lot of people it's like they found their way here by chance and then it's also kind of it just grip it just grip them um there there's two kind of i guess big sections i want to dive into with our conversation the first one salamander research and alameda is a firm and then also ftx the new exchange i'm going to start with alameda because i think that's probably a good base i think that's where you also started that ftx comes after um so what's the best way to describe alameda research or alameda i'm not sure if you call it a fund what what is alameda for everyone that's unfamiliar uh with you and with the firm as well because i think a lot of people are going to listen to this and say what like how did i not know about this and i started connecting the dots when i saw cz tweet this last week and i had another friend who told me he was helping you guys out and a lot of things and i was like whoa whoa there's a way bigger story here so what's alameda in one or two sentences and the best way you could describe it yeah so we're you know quantitative cryptocurrency trading firm um and we do you know a combination of arbitrage quantitative strategies liquidity fighting otc trading across a bunch of different platforms we're trading about 30 35 platforms trading hundreds of coins although most of our volume is sort of you know the top assets on the top platforms we're trading about a billion dollars a day worldwide um and i you know doing a sort of a pretty broad swath of crypto trading uh we're you know about 20 something people um and uh we've been you know operating for about two years um one thing that i'll note and and this is like you know if this were sort of on wall street i would say you know work want trading firm and that that would be that people would sort of have a pretty good guess at what that meant sure maybe i'd specify a little more it's quite a bit trickier in crypto because you sort of see these words like quant or market maker or things like this seep into the crypto landscape but take on their own life and so you know as kind of an example of this we no longer call ourselves a market maker we never use that to describe ourselves and the reason even though it's a pretty good way to describe some of what we do is well it's sort of been co-opted by wash trading on fake exchanges exactly you know if you want to say we're fake exchange and we want you to self-trade you asked for market maker so now we can't call ourselves a market maker or we're you know a liquidity fighter instead which on wall street those are just synonyms but but in crypto like so you know when i say you know when i say we're a quantitative trading firm that actually means a lot of different things and you know it it could mean anything from like arbitrage to cta to uh you know we go short coins we think you're gonna go down because we don't like their technology sure and uh you know i think what it means sort of in our case is like you know a lot of arbitrage based trading and then a lot of search statistical model based trading okay so yeah i'm so glad you brought that up and that you have to actually choose between using those words yeah the funnier part is i'm you just look across twitter and i bring up twitter so much because it's kind of like the the hub of where everyone talks retail or even institutional i think crypto is a little bit unique in that space in that sense in the fact that hedge funds and and exchanges and every individual is kind of meeting on twitter and a lot of people will say you know the market makers are hunting my stops or they're talking about some random altcoin on some you know exchange that i've never even heard of and it's like well is that really a market maker is that just some guy that owns like 25 of the supply and he mined in 2014 so it's it's funny all the words kind of do take a different meaning in crypto i was gonna dive in there and say you look at alameda and you say you know is this an otc desk is this just uh you know are they just doing arbitrage for their clients and i guess the the other way that i want to break this down is there's maybe some other firms that people might recognize whether it's tagumi whether it's omni-x whether it's falcon x what's the biggest contrast with alameda what's kind of the difference there or are you just literally in that same group and and you kind of provide a different niche what's the contrast we're in a very different group from them um and as you say it's really hard to like you know it is we need to do we need we need new words like exactly everyone's just using the same words to describe very different businesses yeah and so um so i i think that like maybe to point at some of the differences there uh one is that our sort of core quant training operation doesn't have customers we don't have investors we don't have we're not a fund we don't have customers um we're a proprietary trading firm and what that means is that rather than you know if you look at some of these kind of platforms is maybe what i'd call like the omni x type types you know the falcon x's like those are primarily like it's not doing kind of internal quantitative trading and obviously it's going to vary a little bit from one to one but sort of the general business model there is more they're an aggregator of liquidity across a lot of venues and market makers or sorry liquidity writers um yeah and uh and what they do is they kind of combine all those together in a clean simple ui for customers um and act as an agent custom customers customers primarily being funds uh yeah although in crypto again you know in normal finances like what's a customer it's either a ton of retail or it's like a pension fund encrypted what's a customer i mean it might be like a guy who bought like 10 000 bitcoins when they're two bucks each and now he's a whale and you're like is that a customer is that like a fund is it like i don't know it's kind of both i see what you mean yeah it's it's less of an outlier here yeah yeah exactly um and uh you know it's a lot of it's like some family offices but to buy a lot of bitcoins and sometimes they buy and sell them like that's a customer in crypto okay um and so uh so you know that's sort of um you know what what that like uh archetype is and what we're doing rather is more sort of uh you know trading on exchange mostly uh we don't trade for customers um we're just trading our own money and we're sort of you know looking for quantitative training opportunities whether that's an arbitrage between two exchanges whether that's some sort of you know uh model that we've built that we think predicts short-term price action in some assets whether that's understanding the relationship between derivatives and their underlyings uh whether that's understanding exactly what a tether is worth um and uh putting all those together to basically say hey like here's a case where we think we can you know sell an eath for a tether and we think it'll be good by you know a tenth of a percent to to what we think each tether is actually worth um and uh sort of you know building that out to a bunch of different assets and crypto platforms types of trades um and uh and it's all just done on our internal book and uh you know the the form that it takes is often sort of a liquidity fighting form in that you know a lot of what we're doing the the sort of line between arbitrage and liquidity fighting is quite blurred because if you're prying liquidity correctly then whenever you get a fill you can kind of push out of it but exactly so uh you know all these things get a little bit mixed together when you drill into it um but you know that's sort of the way to think of this maybe a way to think of this is sort of like an hft firm how people would think about hft firms except instead of being sort of high frequency you know just trying to take against people who are slower it's more like trying to have like moderately more sophisticated models um for a lot of the assets so we you know operate on a moderately lower frequency and we do more sort of providing and more uh you know uh trade trying to you know do want trades on a bunch of different types of assets then like through the bread and butter hft trade of like you know five milliseconds i think i'm gonna make money on this um but in terms of you know being a proprietary trading from just trying to do trades we think are good on our own book where we're served more in that mold it's almost like the infrastructure here forces what would be hft trading like you said to almost be like a slow motion of it's it's still way faster than what anyone else is doing but it's like it's as fast as you can go making it slightly more efficient like exactly yeah right and it's a good point right like when when half the matching engines and crypto lag by half a second like what's it mean to be a millisecond time scale crypto trading firm exactly um and and you know when it takes an hour to move an asset from one platform to another and you can't share your collateral between them like sometimes you're like oh i want to do this trade i'll be able to do it in an hour so maybe three hours if it's bsv you need to move around and uh you know it doesn't matter how fast your systems are you're not gonna speed up the bsv blockchain like so uh yeah so exactly the infrastructure here is so underdeveloped and rickety that like a lot of what we do you know we whatever we build models some of them are kind of cool um but like you know you drill into it on a specific time on a specific day you know got some people who are like doing some cool studies testing some intuitions we also have a lot of our traders who are like we need to withdraw like 500 bch from this exchange right now and our daily withdrawal limit is 200 and they also haven't processed for 12 hours and uh we're waiting for a phone call and what do we do now and so think well we can like here's some ways to ride around this like here's the people we here's the wechat accounts we need to contact and solve our problem like we spend a lot of time on on wechat right because like i don't know you got your coins stuck on some exchange they're gonna let them out eventually but like you want them right now no and they're kind of like yeah we'll get you know a security process something something 24 hours and you're like no yeah yeah no right what you do you like call them up on wechat um yeah so you know we do a whole lot of operational work um another side of this is like banking um you know for anyone who's tried to to bank and also trade crypto it's a it's a nightmare i mean you go you know we had a bank of america account at one point and um you know we we can't go in there each day and that the bank tellers get super excited because it's by far the most exciting part of their day when like we don't all walk in be like yo okay so we got like 10 million bucks of wire transfers and we got to get them out 20 minutes after you receive them you're going to get them in about 30 minutes and it's going to require approval of your manager's manager's manager and it's going to be going to these five places and we got to get all this for whatever we have this whole thing that we need i never got really into it then at the end of the month you know there's a serve compliance review and you know that like you know you know sort of master compliance is like so tell us about this alameda research they seem to be a large fraction of your bank's wire transfers and then the charge is like oh yeah we love those guys like you know it's a bunch of 20 year olds they're uh i think that's cryptocurrency trading startups sending you know 10 million bucks a day to you know these like businesses all across the world that are trading coins and and like in like all these currencies and and supplies like what that's like literally the worst client you could have like what are you thinking like imagine the aml the anti-matter laundering and know your customer risk that we as a bank are taking on like can you ask them to track every bitcoin like obviously not like no yeah and and so you know saying when you decide to do this it's actually a hard problem and so we spent a lot of time you know talking to reps from banks about like finding a solution that will work from us for us you know we spent a lot of time like white listing addresses on cryptocurrency exchanges talking to account reps um and uh you know i'll spend a lot of time dealing with aws because that's where crypto is um and so you know there's a whole lot of operational things that that sort of go into this as well of course uh you brought up that good example of when you started or i guess when you recognized it for yourself and you're like okay there's a massive opportunity here's the here's the value it could actually capture and i think i've pretty i have a similar experience i don't know if it was pivx or some privacy coin got moved from bittrex to binance and i think this is maybe the only asset class where like an individual retail individual can recognize there's going to be an arbitrage try to take advantage of it and then it still takes so long because the blockchain can't handle the withdrawal and the deposit and i'm like look i was just making him like maybe making to look you know five thousand ten thousand dollars and it still can't even like the trade was right it's just the infrastructure isn't isn't ready um exactly yeah and and i think one of the key pieces there that makes the these serve opportunities seem to exist but be hard to take advantage of is in finance it's not that you can move apple instantly from one exchange to another is that you don't have to because you just have centralized clearing firms that are like look we see your entire book we know you're hedged we saw you buy apple there and tell apple there like we're not gonna make you move your apple from one place to another we'll deal with that and and in fact they'll give you margin and things like that and so you know rather than have to wait for a blockchain the equivalent would be just short sell pivx on binance you buy it on bitrex and then you're done those net out yeah but uh in crypto no like a binance pivx is just a different coin from bitrex pivx and if you want to turn one to the other it's going to take you some hours and there's no lines of credit there's no margin trading on most of these platforms if there is most of it's bad and uh and that just means that like it's not easy to close these down and sort of another example of this is you know we have a hedged book and you know maybe you'd say oh great your book's hedged like i guess you don't need much capital then no we need a lot of capital why is that well i don't know we got this large position on one exchange this offsetting position on the other and they don't talk to each other so each exchange is like this is a big risky position like no it's not we're hedged yeah yeah exactly so we have to separately collateralize every single position we have including offsetting ones if we want to be able to sell on binance we got to have a bitcoin there if we want to be able to sell on betricks you gotta have a bitcoin there we can just keep our bitcoins in one place so you know the result of this is that the whole place is it's super messy and fractured the liquidity is all over the place you can't net things out against each other easily um and it means that these arbitrage opportunities they they pop up and they're actually operationally difficult to take advantage of yep it's the trustless nature of it in in a lot of ways cures some inefficiencies but in terms of trading in terms of speed and in terms of efficiency it actually kind of makes things slower one of the things that you guys put out that caught my eye was you trading exactly one of these one of these opportunities it was a seven i think it was a 7 000 bitcoin seller on binance it was a week or two ago and it pushed them i think the bitcoin price was per the video and i was also watching it live sitting here at my screens like two percent below the rest of the exchanges which isn't a lot right some people are listening and saying oh two percent is whatever but two percent on an exchange like binance versus bit max and bitfinex and sometimes there's a slightly different price based on tether or whatever it is but that was a pretty big discrepancy and in the video you're talking about look how much money do we have on on binance if we're already long or short somewhere else you know can we just kind of capture it can we stay neutral right can we get enough money to finance can you kind of walk us through or walk me through and everyone else what was going on there yeah yeah absolutely and just to address your point you know is two percent a little or a lot it depends on how big you're doing it and the cool thing about this was it was a hundred million dollars so if you could actually make two percent on a hundred million dollars that's a lot of money um and uh you know then the question is well how much can you do so so what happened was someone sold you know 100 million bucks of bitcoins on finance and the way they did it was they just they just did it they're like here's our bitcoins we're selling them now um so they placed a giant offer they sold some they stuffed the offer down they sold some more they stuffed the offer down they sold some more and uh bitcoin's crashing because of this guy but it's crashing more on finance than anywhere else because there's a giant seller there and you know what we want to do is just lift his entire offer and hedge by selling in some other places and have made a lot of money but we can't do that because we don't have a hundred million tether sitting on finance um and again because you can't net out across exchanges so you can't do large margin trades etc uh you can't just even if you think you're hedged you can't just lift this so you know what were you thinking there well one thing is like we want to figure out when we want to buy this eventually we decided it was time to buy is that sort of a low enough price that we thought we were just going to be able to hedge it make money on the arbitrage but in order to do that we needed tether there and we spent all of our tether lifting the first piece of this yep and uh and so we're kind of frantically you know collecting all the tether that we could getting it over there you know thinking about things like okay like we want to be sending you know it's now erc20 tether which is faster you know but like it's not white listed from this place to finance we can't send directly from you know okay ex to finance we gotta route through this third place that's gonna add on another 20 minutes and you know margin account here and like you know all these different things and so you know one part of this was us kind of scrambling to just like get all of our assets in the right place and then on the back end of course we need to hedge this you know there's a lot of bitcoins which you're trying to buy and we had to be very like all right if we start buying these we got to find a place to sell what where are we selling what's the best place to sell where are we going to be able to get enough size off where's the best price do we have enough capital there to be able to do it like do we need to be you know shuffling capital around on that end and then you know the third thing that we're thinking about is what's a bitcoin worth now usually it's easy just look at coinbase and that's pretty close you know maybe it's off by three bips or something right now binance is two percent below everything else so i don't know what bitcoin's worth you know is it worth of finance bitcoin so worth a tether bitcoin a coin based bitcoin a future bitcoin those are all really dislocated and so you know separately you know someone comes to us otc and they're like hey we'd like to buy a bitcoin from you what price we sell to them at i don't know you know it's pretty ambiguous and of course we're in competition with other people for that trade so we're trying to guess like what's the world think of bitcoin is right now what do we think it is where are we putting this what you know and that obviously depends not just on the current prices but on what the up with this guy does he have another billion dollars yeah is he smashing again or is it is he going to keep yeah exactly where is that coming from what's he saying exactly and so sort of all these things were flying around at once and started the cool thing that happens is is this in real time and i think this actually be a pretty boring problem if you could write a year-long research paper on it you'd spend about three days thinking about it and then just do like a lot of grunt work like figure out exactly how to optimize the tether and if you're like here's my report and you didn't be super boring um but you know you don't have a year you have a minute like every minute you waste someone else is trying to do this and they're going to beat you to it and so it really is just like all right we're not gonna do this perfectly like what's the right first step here or what's a reasonable first step or what's the best first step we can think of in five seconds of yelling at each other yeah what uh i didn't hear too much yelling you guys were actually pretty calm in the whole in the whole situation yeah um you know we yell when there's a lot of noise in the background um but you know when when no one else is like late at night there aren't that many other people in the office things were pretty quiet um and so we're just sort of uh talking relatively calmly to each other that must have been it i was like oh they actually stayed relatively calm i feel like that's a rather big trade and everyone seems everyone seems pretty under control i think it was handled efficiently yeah um before we go into um the my biggest question is why share this publicly and i think there's kind of a really cool thing you're doing with alameda and also with ftx but also before we get into that with still the binance situation i'm sure this is going to relate to other situations going forward um how much of what you guys do is human or is kind of uh subjective versus how much of it is just systematic where your algos are picking it up or you're toggling some settings i know you talked about in your video and and i can only imagine uh someone trading a billion dollars in volume every single day is sometimes tweaking volumes in terms of or selling more tether understanding different things like that like how much of it is you guys seeing an opportunity like someone actually putting that much in the book on finance versus your systems trip you up and you say okay it'll kind of handle this on its own what's the trade off there yeah so it's sort of on the border and the way it described is almost all the volume is done by automated systems but with a really heavy manual input um and you know i think i i the the way i often think about our bots is as you know really dumb humans with ten thousand hands um like they're just doing what we told them to do and they're not very smart they just do exactly what we tell them to they don't innovate but they're fast and they can do a lot of things at once and so as much as possible you try and offload everything to them but you know if the world changes they're not going to know that right like sure we have these algorithms or whatever our algorithms were not trained on a 7000 bitcoin seller on binance right you can imagine running some historical algorithm of bitcoin price and like about zero percent of your model is going to be what happens when someone sells 7000 bitcoins on finance so we just like don't actually think our models are like particularly tuned to that they'll try and do something reasonable like they like doing arbitrage they like being hedged they're gonna try and trade those off again you know whatever like they're they're gonna try and do reasonable things but they're not going to like really be maximizing that and so whenever anything kind of weird or big or unusual happens uh you know humans will sort of jump in and i it's almost like i i sometimes think of just like be the dj like you got this like if you don't do anything as a dj the muji it still plays it's still there and people are happy but like the fun like people are yeah exactly but like you know then you're like oh god like everyone really wants an uptempo song and like this is not that and you know you gotta start like you know uh and so you know that that's often how i think about it in my head and and you know we'll we'll jump in and we'll do everything from to like hey like i really think we just need to be optimizing for tether on finance right now like our boss are like yeah i think we should move a little tether over and we're like no you should move a lot of tether over okay um and you know a lot of places it has a lot of safety checks it has a lot of like you know not wanting to do big things for no reason and and we sort of want human sanity checking that um and and one of the big reasons is the bot says hey there's a hundred million dollar two percent arbitrage um is there like i don't know if your computer is telling that to you maybe there's just bad data right like you know can just conditional on your computer thinking that i think there's a pretty decent chance that like binance accidentally started publishing order books from yesterday or something um and if that's the case then you don't really want to like close down all your positions to send like all of your money and tether to binance sure um and so you know things like bad data actually play a pretty big role in crypto which is another reason that like we really want humans sort of sanity checking anything big um and so you know we'll be everything from reshuffling capital to being like hey i think we like buy some bitcoins right now to sort of being like hey i think we want to like really look for a lot of edge in trading this thing like this is super toxic flow we don't know what the is going on like we're gonna lose money if we're just trying too tight carrots being like hey we really want to do all this trade this is a great trade um and you know to like hey like this is where information is right now like our models don't understand that um and so there's you know we have a spreadsheet with like tens of thousands of parameters and then we have uh sort of internal systems that have a smaller number of parameters um that we can kind of tweak in real time uh to kind of get the bots to do what we think they should be doing the d you're the dj your systems are kind of the music that's going out and you're just making sure that that they're that they're playing the right song for the environment i guess for the market texture exactly and when things are quiet you can't look at the dj there and you see him going like occasionally i kind of think he's not doing anything like he's just doing that but he is he's modeling right he's monitoring and like maybe it wasn't really important that he like wiggle the sand a little bit there but like you know he's there because sometimes you really need him there and that's how surf we think about too when things are quiet you know our traders are mostly working on longer term modeling and then when things go crazy they'll just jump on and think about like in the next 10 seconds what do we need to be doing i like that i like that analogy i didn't think we're gonna be talking about djs today but uh it's it's a really good analogy um past that past kind of the technical background of what's going on there with the trade why you're doing it who's actually making the play whether it's a human or whether it's an algorithm why are you sharing this publicly i think that was the biggest that was the question that came to me it was like first of all i'm interested yeah and second of all i know someone told me to check this out and third of all there's something here but why are they making this public there's a lot of for i mean especially in finance i think maybe i think i had willy woo on here last time and i plan to have on uh i won't name their names in the next two weeks i'm going to keep it secret but a lot of people kind of keep their cards close to their chest maybe more so in crypto they open it up and share research and there's this ethos of and it also makes sense right share your research you can gain reputation you can get a lot of leverage that way but i haven't really seen a quant firm or a fund really going behind the scenes of you walking through a trade live and things like that so why do that yeah why do we do that so i think you can maybe give two answers the first is why do i think we didn't lose much by doing that and the second is what was the actual impetus for doing that um so the first thing that i say is you know why does no one do it in finance well one of the biggest reasons is people are terrified about leaking ip people are terrified about everyone else figuring out how they trade um this particular case like i don't know if everyone in the world knows that we like buying bitcoins two percent below the market i think i'm okay with that uh i don't think we're kind of giving away industry secrets there um and and i think this is sort of an interesting case of a trade where you know it wasn't some like really cool secretive model we had that's really insightful and you'd never come up with but generates a ton of money it's like okay here's a big dumb arbitrage let's try and do it so you know this particular case is what wasn't really particularly ip sensitive um and uh and i think that's all sort of an interesting thing cryptos you get a lot of these where like there's a really good trade and actually can talk about it and people still can't do it because the limitation is not realizing it's there it's having the infrastructure to be able to do it having the you know the limits and the capital and like the systems and the accounts and the banks and you know putting all those things together um so that's that's our one piece of the answer um maybe another piece which and slip in sort of a third thing as well um is that um we are quite a bit um i don't know what the right way of phrases is exactly but quite a bit leaner um organizationally than a lot of quant firms are um and we're you know 20 people or so which is it's not nothing but it's not you know a 500 person firm we're not very bureaucratic um yeah i think at most firms an idea like live streaming this would just get shot down out of hand on the grounds that that seems like probably bad and we just don't want to deal with that and same monopoly leaner in terms of team size but in terms of volume i mean you guys are definitely you're in the heavy hitter yeah okay so keep going keep going and then we'll hit that later yeah um so you know another thing is just like we actually have the ability to green light things like this um whereas at a lot of firms it's just like yeah okay we gotta have a meeting with a lot of people consult these like sure we had five seconds to make this call like it is now enough for um and and then the last thing is why do it um you know i mean i think one side is like i think it's a pretty cool opportunity i think like people have basically no idea what's going on behind the scenes at quant firms and i think that this is sort of an interesting window into it to showing like both some of like what makes us a quant firm and also what is sort of uniquely crypto about this and how much of a role the infrastructure plays i think this is think that i kind of harp on a lot when i talk like the infrastructure in crypto really matters like way more than you see in finance in traditional finance like it's really rickety it's really difficult to use when you really need it and you just see all these pain points from the fact that there's no clearing firm there's no shared collateral there's you know margin trading is completely on most platforms or non-existent and i think this is a really good case of like yeah there's just two million dollars to make if the infrastructure was perfect but it just wasn't and the entire trade was trying to navigate that and so i think it just like really underscores a thing which is i can say it as much as i want but i don't think any anyone's really i think it's really hard for it to register how central that is to a lot of areas of crypto unless you see it in action you're like okay yeah i now see that like that whole trade was figuring out how to deal with the fact that like you know all that finance knows about is the tether sitting on finance there's not really um i guess everything is so standardized in in traditional finance as opposed to here it's still fragmented i mean exchanges are what was the thing i was trying to um i was just connecting like a public tool like a free resource for everyone i used to publish like a free it would kind of track bitcoin trends and use moving averages and things like that and i was talking to developers i used to work to work with at a previous broker and they said you know what exchange like what do these exchanges use in terms of apis is it fixed is it and i was like well i don't know i think i was like i think they just change it all the time i'm not really sure and he's like he's like yeah i think they do too i'm looking at the documentation it's like okay that's a little bit worrisome so it's i think a lot of people probably see the problem and then it's you know very few people like yourselves or their funds set up in a similar situation can actually take advantage of it i think that's right and like we've spent thousands of man hours like probably 10 000 man hours or so dealing with exchange apis like how did you trade on 30 platforms with a goodie like institutional size setup you spend a whole lot of time digging through these boxes every exchange is different and most exchanges are just not complete they're like yeah our api doesn't give you your fills and we're like all right well how do we know what trades we did they're like i don't know we'll fix it next week exactly and then next week it's definitely not fixed um and so you know some ips they're like yeah we don't we only tell you your balance by market not your overall balances like final just scrape all the markets like all right but you can only call the api once a second and you're like all right so you're telling me that this second i get to choose whether to know how many bitcoins i have or how many tether i have but not both and and you just run so many problems like this and you're like all right well this exchange it's an app it actually doesn't even have a browser let alone an api and um and it's sort of a cool technical problem of like how do you trade on a lot of venues when these apis are all over the place what's going on guys hopefully you're enjoying the conversation so far we are right about to get into uh what alameda is specifically doing on these platforms whether it's binance whether it's bitmex how they're actually managing their strategies how they were able to get to uh you know five or six thousand bitcoin profit on an exchange like bit max what type of strategies they're employing and the amount of access that this conversation gives and that sam uh was able to open up to i think is really really cool um before we do that though i do have one quick message from my sponsor glassnode.com who's helping

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conversation the rest of this is a good one and hope you guys enjoy yep one of those venues you guys do trade on um bit max probably the most well it is the most liquid uh perpetual swap and bitcoin exchange as well i had arthur on earlier and talking about the most successful product pretty much in bitcoin's history right he launched the bitcoin perpetual swap i'm not sure yeah what they do in terms of volume every single day but um the other thing that caught my eye and and why i put so many of these puzzle pieces together and was so um interested in having this conversation was alameda is in the top i think they hold two positions in the top 10 in terms of the bitmex leaderboard which a lot of people pay attention to those positions are like 5200 and 1600 bitcoin notional profit which i don't know the exact numbers it's somewhere between like 50 and 70 million dollars are you guys you know is is bit max primarily where you were trading before is it a lot of finance or kind of what's the story there and then the other side of it it's really this it's it's really the same question as your binance trade of why have that there is this is it um you know what's kind of the incentive yeah yeah so uh to answer the first question and we we traded a bunch there but it's not the only platform we use it's not a dominant one it's one of the top ones um you know i think it's it's one of the top three or so by volume for us um but it's not an outlier uh you know we're and we're in trading on third year so i think the bulk of our volume is on seven platforms or so okay of which bitmex is is one of them but not a dominant one okay um and uh so uh you know we we obviously do do use it a bunch um we also have some other accounts there um maybe even some other in the top ten i think which are not at surefield um but if they are if they are they're still using default names that the biggest question was like i saw one element and then i saw alameda at gmail so okay um yeah two public ones um so uh you know to get to sir your other question of uh of why do that um so basic answer is uh that you know we especially until recently uh have had basically no public profile i think until january so this year we were basically hiding under a rock uh this dwarf was mimicking the traditional wall street approach for quant firms of like why would we want anyone to know we existed sure that just seems bad like in vice competition and i don't see what we get from that um and so we sort of took that approach um only the exchanges knew we existed no one else um and uh then things changed uh the first thing that changed was we launched an otc business so we now have uh an otc desk we have an automated otc system so we have an rfq platform where you can kind of query for quotes 24 7 and instantly trade uh in you know 20 or so coins um and we also do uh you know uh uh text uh trades as well um and uh we were sort of building that business out and you know we thought we had a pretty cool product there um but we didn't know anyone like we know any customers and uh you know we sort of we're trying to think basically what's the best way to kick start our pr here like you know if if we sort of want people to know that we're a place they should look at when they're looking for liquidity like how do we do that and you know there's a lot of things you can do but the problem is almost all of them have very little signal you can advertise right you can go to conferences there's like all these things you can do but anyone can do them like it's very very hard to distinguish whether someone's legit from that or just decide to spend some money especially yeah and especially here and it's just like what can you like it's actually very very hard to think of any pr strategies that have signal in them where you're like yeah okay that's that like that advertisement i just saw really should convince me of something and uh and we sort of thought of this and we're like okay this this has signal like obviously it doesn't tell you everything you need to know about us like i don't think you should see our position on the leaderboard and be like yeah that's the best otc desk like you know no you should separately evaluate rotc desk but it was enough for people to know they should take us seriously and that it was like sort of the biggest thing is like worth their time to bother onboarding with us you know to bother filling out our aml kyc forms um to bother figuring out how to use our product and and we sort of felt like once we get to that state then people just judge it on its merits and if they think it's the best otc desk great and if not fine use someone else but we we want people to get to that to that point and this just seemed like by far the easiest way of getting there um and i think he was probably relatively successful at that i would say so as well i think it's also like you said it's it's it's an objective measure as opposed to someone looking at the two and saying oh that's good advertising or i've heard a good thing about them you can say okay this is um like most of finance and why i think most of us are attracted to it there is uh at the end of the day there's there's a very objective scoreboard of how well you did um yep in terms of of that and if this uh question crosses any boundaries feel free to uh not answer it but with your your bitmax approach and just reading it on alameda's uh website and also understanding from everything you guys are doing your mandate is to say market neutral is that primarily what you're doing still even with the bimx strategies or are those are you also taking what's going on there yeah yeah yeah so it's um uh the basic answer is that our mandate is to stay close to market neutral um we we will take positions they will not be very large um compared to your balance sheet so you know we might put on uh you know we might put you know a percent of our balance sheet or so into a net delta um you know we're not getting a hundred you know we're not buying 80 million dollars of bitcoins and sitting there um but you know we might especially for a short period of time think you know what i think like ripples can't go up over the next hour like you know we're gonna buy a little bit and uh and so the answer is that like we are you know from sort of a you know amount of capital standpoint very close to hedged um but not exactly hedged um and you know what's the line between those a line between those is like well how much would we lose from this you know we don't want to put on a position bigger than we're prepared to lose and so uh uh that sort of is you know and we don't want to put on a position where we're kind of not sure if it's you know we don't want to get close to that point um and so uh that's sort of how we determine how big uh you know of of a position limit we have it's it's small but it's not nothing okay cool i had to ask that because i know some people are gonna gonna maybe some people will string this together maybe some people will completely miss it but i imagine many will be like okay if they're market neutral how are they exactly racking up that kind of position but i think that uh that at least gives them enough enough rope there uh in terms of getting away from bitmax and focusing on your own venture ftx when was this introduced and also was this always part of the plan for you you were already kind of in this business your provided liquidity you understand that there's a lot of infrastructural uh inefficiencies you can take advantage of you probably are also dealing with all these apis that we talked about that are broken you see all the problems behind the scenes and you say not only can we fix this but there's probably new products we can offer and there's probably also another i don't even know how many basis points you can make by playing in that in in that field what's the biggest incentive behind ftx and then also was this always part of the plan or was this something that kind of came later so as you said i i think is exactly right that like we we saw a lot of the pieces coming together for a while um you know we spent so

2020-12-28 08:04

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