Crypto conspiracy theories abound, but prop traders are just doing their job

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Alameda Research is a cryptocurrency trading and liquidity provider founded by crypto billionaire Sam Bankman-Fried (SBF). Prior to founding his company in 2017, SBF spent three years as a trader at quantitative trading giant Jane Street Capital specializing in stocks and bonds.

In 2019, SBF founded crypto derivatives and FTX exchanges, which quickly grew to become the fifth largest company by open interest. The Bahamas-based exchange raised $400 million in January 2022 and was valued at $32 billion.

FTX’s global derivatives exchange business is separate from FTX US, another SBF-controlled entity, which has raised another $400 million from investors including Ontario Teachers’ Pension and SoftBank.

The self-made billionaire has big dreams, such as buying finance giants like Goldman Sachs, and in July 2021 he previously stated that “mergers and acquisitions [mergers and acquisitions] will be the most likely use of the money” raised from investors.

On June 18, crypto broker Voyager Digital announced that Alameda Research had agreed to offer the company a $200 million loan (USDC) and a “revolving line of credit” worth 15,000 Bitcoin (BTC) worth $319.5 million at current prices.

During an interview with NPR on June 19, SBF stated that Alameda Research and FTX “have a responsibility to seriously consider intervening, even if it is at a loss for ourselves, to stop the infection.”

In the interview, SBF noted that his companies had done so “several times in the past,” including a $120 million loan to the then-financially troubled Japanese cryptocurrency exchange.

This news raises some interesting questions, but most importantly, traders must understand what a owned trading company is and how market makers operate in the cryptocurrency industry.

What is a proprietary trading company?
Proprietary trading means that the investment or vehicle company uses its own money rather than seeking commissions from clients’ trading. Banks and financial institutions use this trading strategy to make profits, and carve out risk from their balance sheet.

By applying sophisticated modeling and trading software, quantitative firms resort to various strategies to find a competitive advantage over ordinary traders and investors, including arbitrage, derivatives, and high-frequency market access.

Also known as “prop trading,” this activity is a common concept in traditional finance, bonds, stocks, commodities and debt instruments.

What is liquidity provision?
Entities that provide liquidity facilitate trading in financial instruments by offering their own resources so that buyers and sellers can trade easily. Liquidity is the ability to convert an asset into cash, therefore, “liquidity provision” basically means market making.

Market makers are organized entities in traditional finance. Their job is to keep a minimum bid and ask for quotes at all times so that investors find the necessary liquidity when entering or exiting the market.

Usually this process is handled by specialized trading companies, but the activity can also be carried out independently. Official market markets have access to lower trading and funding fees, but anyone can operate arbitrage trades at their own expense and risk.

What is Alameda Research’s connection to cryptocurrency?
Alameda Research, Jump Trading and DRW Cumberland, are some of the leading sponsored trading firms that provide liquidity to centralized exchanges and use Decentralized Finance (DeFi).

These companies aim to make a profit for their shareholders, but sometimes that means creating direct exposure to crypto assets and intermediaries. In short, they take risks for potential long-term gains – risk is an essential part of a business that provides liquidity.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You should do your research when making a decision.

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