How FTX plans to redesign the US Futures market with crypto technology

ftx tries to shake up the extensive US derivative market, which represents the largest intervention of a crypto group in the heart of traditional finances.

The three-year-old stock exchange, founded by Sam Bankman-Fried, strives for the approval of the US Commodity Futures Trading Commission to offer customers Bitcoin futures-contracts with which users can bet on the price of the most active digital token.

The proposed procedure would be out of the way the brokers who have traded in the past 40 years as an intermediary between customers and the stock exchanges where shops are made. America is a large part of the global appointment market, on which 29 billion contracts were traded last year, which means that the effects could be more far more if the plans are approved by FTX.

Instead of prompting broker customers, adding additional cash, known as Margin, if trades are going badly, the stock exchange would automatically monitor the market 24 hours a day, seven days a week and load the customer olds accordingly.

This rewrites the mechanics of the futures trade, and if it stays that way, it could also apply to everyone who acts on the futures markets, from farmers, the prices for corn, to hedge funds that rely on oil prices.

Automatic liquidations vs. Margin Calls

The focus is on the leverage effect. Futures dealers usually only use a small fraction of the total value of their position, which enlarges potential profits and losses. The chips that market participants put on the table are called "margin". The margin is of crucial importance when trading, since it ensures that the participant can be made completely on the other side of the trade if a bet goes wrong.

A significant difference between the currently existing system and the FTX proposal is the margin approach. If a bet falls too deep under water, a broker will ask a dealer under the current framework to raise additional means up to a certain period of time to support the trade, which is referred to as "Margin Call". When the trader fulfills the Margin Call, his trade remains open, otherwise the broker begins to dissolve his positions and withdraw the margin used for the trade.

of crypto exchanges such as FTX and Binance-global platforms that are largely unregulated-the margin requirements for products such as Bitcoin futures are constantly updated. Traders act directly with the stock exchange and not on a broker.

crypto platforms start automatically with the processing of positions when a user's margin falls under a previously defined level. Usually a user receives a warning if his account is in danger - but given the volatility of digital assets, this type of compulsory liquidation event can lead to retailers being wiped out extremely quickly.

In contrast to crypto, which is acted continuously, most traditional futures, such as those who track raw materials, close at the weekend. However, since most actively act during the business days, some smaller market participants have declared that they fear that they will be wiped out outside of business hours as part of the FTX proposal. In contrast, a Margin Call offers some scope to meet the financing requirements.

Case study: Crypto "Flash-Crash" in May 2021

Automatic liquidations are already used to a large extent in the crypto industry, where Bitcoin futures worth $ 1.3 trillion were traded last month alone. Dealers can be extinguished extremely quickly in times of market turbulence, whereby more leverage increases the speed with which a user is forced to liquidate.

The following case study is based on a "flash crash" about a year ago that caught many levered Bitcoin dealers on the wrong foot. The dealer in this figure has built up a 100-fold position on Binance by using $ 2,500 on a trading with a nominal value of $ 250,000. When the market begins to stagger, you have to invest more and more money in order not to be liquidated, even though prices quickly recover.

The short slump that took place in May 2021 left many individual dealers high losses. Due to automatic liquidations, market participants can usually only lose as much as they have put on the market instead of fault.

The debate

The FTX plan has triggered a violent debate in the United States since the CFTC opened a consultation in March.

The supporters of the FTX proposal believe that this is the next development of the market, since technology in the markets inevitably progresses as it did in the rest of society. It promotes the competition, democratized the appointment trade and protects, which is just as important, smaller investors to accumulate debts that they cannot afford, which sometimes led to tragic consequences, say.

On the other side of the debate, those who say that the traditional system offers an important “breathing space” for important decisions and time to find additional money. A farmer, for example, would not have to worry about sudden market movements that liquidate positions that he had opened to secure himself against fluctuations in raw material prices. Customers would not have to pay more money than necessary to give them security. The intermediaries in the heart of the system, the stock exchanges and brokers, would be able to clear out potential problems in volatile times with human judgment.

The CFTC examines every step of the chain to understand how they work and what consequences they will have, so it takes time. A decision will probably not come this year. It is possible that both models are approved. But if investors explore Bitcoin futures, it could be confronted with further suggestions.