In a recent interview, Stephan Lutz, the acting CEO and group CFO at 100x Group, the parent company of BitMEX, shared his perspective on the alleged trading desk shenanigans at Crypto.com. Lutz believes that crypto exchanges that profit from proprietary trading should have phased out internal market making teams by now, stating that it is no longer necessary in the current market.
Lutz highlighted that there is now sufficient critical mass in the form of High Frequency Traders (HFTs) and prop shops that can effectively perform the function of liquidity providers. These entities can step in and fill gaps in the market when there is a shortage of buyers or sellers, eliminating the need for internal market making teams.
The Financial Times recently reported concerns about potential conflicts of interest at Singapore-based Crypto.com, as the exchange allegedly runs internal proprietary trading and market making teams to trade tokens for profit. Crypto.com responded to the report by stating that these teams are treated like any other third party and exist to ensure tight spreads and efficient markets on their platform.
BitMEX, formerly the world’s largest crypto derivatives exchange, also employs internal traders through a separate legal entity called Arrakis Capital. However, Lutz emphasized that Arrakis now plays a limited role referred to as a “treasury desk.” He believes this transition is a natural progression for crypto exchanges in a market with more mature companies and a greater number of institutional liquidity providers.
Arrakis currently performs specific functions, including converting commission fees earned in bitcoin into fiat currency for operational expenses, hedging BitMEX’s exposure to tokens held as inventory for quoting prices on its platform and other exchanges, and providing market-making services for BitMEX’s token BMEX due to limited external liquidity providers.
When asked about the profitability of the desk, Lutz stated that it earns “very minor returns” of up to $100,000 per month from holding T-Bills. Last year, it operated at a loss.
Lutz clarified that Arrakis had scaled back its market making activities in 2020. In BitMEX’s prime, it dominated the crypto futures market, accounting for a significant portion of the trading volume. However, allegations arose during that time suggesting that BitMEX traded against its customers, leading to public disputes between former CEO Arthur Hayes and economist Nouriel Roubini.
Lutz, who joined BitMEX in 2021, assured that he reviewed the data and concluded that the trading desk was always segregated. He explained that Arrakis was once a significant market maker for the platform, as other exchanges followed a similar practice to ensure reliable liquidity in their order books when external service providers were not available.
Regulatory pressure has recently prompted some market-making firms, including Jump Crypto and Jane Street, to move offshore. BitMEX considered rebuilding Arrakis in mid-2022, but ultimately decided against it after considering the developments surrounding Sam Bankman-Fried’s Alameda Research and FTX.
As the crypto industry continues to evolve, Lutz’s perspective on phasing out internal market making teams reflects a broader trend towards relying on external liquidity providers and the maturation of the market.
