(Bloomberg) – The Wild West days of crypto markets are back as major trading houses that once thrived on price-spread arbitrage are retreating in the wake of FTX’s collapse. This opens up profitable opportunities for anyone who still dares to trade.
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The prices of essentially identical assets on various platforms diverge, a clear sign that the dominoes continue to fall in the world of crypto trading. The spread between identical Bitcoin futures funding rates on Binance and OKEx, for example, has been as wide as 101 percentage points annualized and has remained at or above 10, compared to spreads in mostly single digits. last month.
It’s a throwback to the early days of crypto, when speculators – including former FTX CEO Sam Bankman-Fried himself – found easy money by simply buying an asset on an exchange and trading it. selling for more on another. It is a lucrative form of quantitative trading, which uses algorithms to take advantage of these price discrepancies. But as more sophisticated Wall Street converts entered the crypto markets, these differences narrowed, making it harder to make money from the strategy.
Now, with the demise of FTX sending shivers through the cryptocurrency markets, these players – including large and obscure quantitative funds – are reducing their positions or even closing up shop, making these pricing errors linger longer. long time.
“If you know what you’re doing and have the confidence to have your money on exchanges, there are some very profitable places to trade,” said Chris Taylor, who manages crypto strategies at GSA Capital, a quantum fund. 17 years old. which waded into the nascent asset class last year.
Launched by young alumni of Chicago firm Jane Street Capital, FTX billed itself as an exchange “built by traders, for traders,” with margin lending and a wide array of derivatives. Until its implosion last week, it was consistently among the top five exchanges by volume – and a favorite among quants.
Unlike traditional markets, where hedge funds borrow through prime brokers, crypto traders must post collateral directly on exchanges. So when FTX began restricting withdrawals last week, hordes of retail and professional speculators essentially lost access to much of their assets available for trading, with any recovery now dependent on a bankruptcy process. slow and winding.
The losses are now surfacing. Kevin Zhou, co-founder of hedge fund Galois Capital, said about half of his capital is tied up in FTX, according to the Financial Times. Travis Kling, who managed money for Point72 Asset Management before launching a crypto fund, said a large majority of his company Ikigai’s assets are on the bankrupt platform. Wintermute, one of the biggest market makers, said he has $55 million on FTX.
As quants reduce risk, dislocations reappear. On the largest exchange Binance, the funding rate spread between Bitcoin futures against Binance USD and those against Tether – meaning both track the dollar price – has widened to an average of 17 points percentage on an annualized basis over the past week, compared to almost nothing in October. (The funding rate is an interest payment used to keep perpetual futures contracts in line with the spot price.)
“Everyone is heading for the hills,” said Mitchell Dong, managing director of Pythagoras Investments, which oversees about $100 million. The return of some price discrepancies shows that “things that used to be removed aren’t removed as much”.
His company is canceling its 1% and 7% exposures to FTX in its market-neutral and trend-following funds, respectively, he added.
Fasanara Digital, which manages about $100 million, has reduced its risk exposure to near zero, says its partner Nikita Fadeev.
Traders must now decide if they want to negate their exposure to FTX or create a so-called side pocket that separates these assets from the main fund, says Barnali Biswal, chief investment officer at Atitlan Asset Management, which runs a fund that allocates to different quant managers and has 75% cash right now.
“Secular arbitrage strategies are increasingly lucrative,” said the former Goldman Sachs chief executive. “However, the risk of contagion is high. We are therefore conservative in our approach.
For most of crypto history until last year, the market was teeming with obvious inefficiencies, attracting Chicago giants like Jump Trading and Jane Street. With the advent of professional traders accustomed to scooping pennies from much more competitive traditional markets like US stocks, those price spreads have narrowed and the easy money has disappeared.
The return of these anomalies is now a sign that the fall of FTX has shaken quantitative traders even more than other crypto crashes this year, such as the death of TerraUSD and Three Arrows Capital. Bitcoin fell another 18% this month, taking its 2022 loss to 64%.
The fall of what was once a trusted exchange will have professional traders looking for ways to avoid putting collateral on centralized platforms, such as using prime brokers instead, says GSA’s Taylor . In short, they will want crypto to be more like Wall Street – if the exchanges allow it.
“There was a lot more trust in FTX than there was in Terra/Luna,” he said. “Now you see some of the big players not exiting completely, but try to have less collateral on centralized exchanges and think more about counterparty risk.”
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