The term quantitative trading strikes fear into the heart of many a trader. Quantitative trading firms are almost seem as the boogeymen of the trading world. They are rather sarcastically blamed for being the people to blame when you lose a trade or get stopped out. This reputation is partially due to the air of mystique surrounding quantitative trading. A lot of their operations are rather secretive and only insiders are aware of them. So, this bring us to the question; Alameda Research, who are they? And what do they do?
A lot of people first encounter the name Alameda Research when scrolling through the rather infamous BitMEX leaderboard. Currently they hold 2 spots. Netting over 7000BTC in profit. And this is just from accounts they have chosen to display. Alameda in recent times have been starting to give insight not only into how a quantitative trading firm operates, but also the new found institutional presence in the cryptocurrency industry.
The Birth of Alameda Research
Alameda was first founded during the famous bull run of 2017 by Sam Bankman-Fried and Gary Wang. Sam previously worked for Jane Street. A quantitative trading firm on Wall Street. While Gary previously worked for Google as a software engineer.
They currently manage over 100 million dollars in assets. Trading between 600 million and 1.2 billion dollars everyday across a variety of crypto assets such as spot Bitcoin, altcoins and crypto derivatives. Making them one of the largest liquidity providers in the cryptocurrency industry.
Alameda makes the majority of its money from quantitative trading. However they have diversified into other areas such as creating their own over the counter trading desk and recently launching their own exchange FTX.
The CEO Sam Bankman-Fried goes into detail on how he got started in the cryptocurrency industry in an insightful interview with Venture Coinist.
The first thing that struck me was just how inefficient it (referring to the cryptocurrency industry) was
Interview with Venture Coinist
To understand what he means by this this we must first understand a key component of quantitative trading. Market inefficiencies. Market inefficiencies can be very loosely defined as a situation where the current prices do not reflect all the publicly available demand and supply information, due to negligence or breakdown of buyer-seller communications.
This is best shown in terms of crypto by means of an example. In the run up to the Bitcoin bullrun top of 20000$ there were incredibly large price discrepancies between exchanges. One exchange may have quoted 19000$ per BTC while on another exchange 16000$ per BTC was quoted. If one were to short Bitcoin on the exchange quoting the price of 19000$ and buy Bitcoin on the exchange quoting 16000$ one could make a profit of 3000$ (19000$ – 16000$ = 3000$) risk free. This is one among many examples of a market inefficiency commonly known as arbitraging.
Alameda exploits inefficiencies similar to this on a daily basis (Though not as extreme). Alameda recently uploaded a video to their YouTube channel from a live trading session in which they talked through how they traded a large seller on Binance who created a 2% price discrepancy across exchanges. Creating a perfect arbitrage opportunity.
Alameda also engages in the nitty-gritty of what quantitative trading is most known for. Its large programming and mathematical basis for trading. Alameda like most other firms is quite secretive in regards to these quantitative models. Divulging very little details on how they are formulated. On their website they are intentionally vague simply state they employ “medium term quantitative strategies” such as “mean reversion” and “machine learning”. These terms reveal practically nothing.
However, who can blame them for being secretive? Quantitative models can make millions of dollars. But if the strategy’s leave the four walls of the trading firm the models become null and void, and practically worthless. Secrecy is an essential element of these models.
The Challenges Presented by Cryptocurrency Infrastructure
In Sam’s interview with Venture Coinist he also goes in depth on how cryptocurrency infrastructure as a whole presents challenges to quantitative firms due to its decentralized nature.
One of the key pieces there that makes these sort of opportunities exist but hard to take advantage of is in Finance its not that you can move Apple stock from one exchange to another instantly. It’s that you don’t have to because you just have centralized clearing firms.
Interview with Venture Coinist
Later in the interview he also discusses how the variance in exchanges and lack of co-ordination and standardization between them opens up quite a few problems for Alameda.
For example, one exchange may have a completely different way of interacting with trading programs (Through API’s) than another. While some may be limited in what they can do at all. Not only does he criticize exchanges and their API set-up but also their infrastructure as a whole. Making reference to the infamous order submission errors which are common on BitMEX which prevents trades going through. But also mentioning poor quality exchange matching engines, as well as the way bankruptcy’s are handled while on margin.
The Creation of the FTX Exchange
These issues are what motivated the team at Alameda to create their own exchange called FTX. Which they feel is done the right way for all party’s.
FTX is a cryptocurrency derivatives exchange built by traders, for traders. We strive to build a platform powerful enough for professional trading firms and intuitive enough for first-time users.
FTX has put a lot of time and effort into developing infrastructure so they don’t suffer the same problems like the ones highlighted previously. They have developed a more advanced liquidation engine to prevent claw backs, as well as working on platform stability and there matching engine.
Not only has FTX worked on doing the basics well they are also the exchange that is leading the way in terms of product innovation. From the launch of the exchange FTX has listed a whole host of new trading products. These include brand new leveraged tokens, perpetuals swap contracts on a range of coins, new tradeable indices such as altcoin indices, and a privacy coin index among others. These allow you to trade the altcoin or privacy coin market as a whole. FTX has also joined the list of cryptocurrency exchanges to offer options trading.
FTX has also worked on creating brand new features. These include things like Quant Zone which allow users to create their own quantitative trading programs, and a variety of trading competitions for traders to take part in.
In conclusion I feel that as a whole Alameda Research represent a rather changing cryptocurrency space. Their presence as a whole may be a net benefit. Increasing liquidity and market efficiency are good for the space and will further drive an increase of institutional on boarding. Although many retail traders may feel justifiably put off and even fearful by the ever many might see it as a necessary step forward.