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FTX Came Dangerously Close to Upending Futures Markets

Sam Bankman-Fried’s firm had a radical proposal to shake up futures markets that would have consolidated power — and money — at his now-bankrupt exchange.

FTX wanted to carry out every aspect of customers’ crypto derivatives trades on its own.
FTX wanted to carry out every aspect of customers’ crypto derivatives trades on its own.

Everywhere you looked, there it was, the ghostly outline of three letters: FTX.

The confab in Chicago this week was supposed to be another celebration for the golden boy of market structure, Sam Bankman-Fried. His FTX flexed its platinum status at an earlier Futures Industry Association conference in Boca Raton, Florida, hosting a late-night cocktail party by the beach, holding a fireside chat with A-Rod and handing out branded swag from its tricked-out mega-booth in the exhibition hall.

The 30-year-old brought pizzazz to an industry that lacks fleets of Lamborghinis and is filled with job descriptions like exchange operators, risk managers and commodities regulators that make the eyes glaze over.

A banner at FIA's conference in Chicago covers up the logo of FTX, the crypto exchange that filed for bankruptcy days earlier.Photographer: Isis Almeida/Bloomberg
A banner at FIA's conference in Chicago covers up the logo of FTX, the crypto exchange that filed for bankruptcy days earlier.Photographer: Isis Almeida/Bloomberg

He and his band of twentysomethings integrated themselves with finance’s old guard, who, like everyone from US regulators to politicians to Tom Brady, were willing to listen because they were throwing money around — the go-to strategy in the Bankman-Fried playbook.

As became strikingly clear last week, FTX ran its business quite differently than everyone else in the room.

While many of the details around FTX’s remarkable collapse will only be revealed as it progresses through bankruptcy, interviews with FIA conference-goers this week show they’re facing a reckoning of their own. The group’s staff may have papered over the FTX name on banners across the lobby, but they can’t fully erase the fact that many sophisticated finance pros were duped by Bankman-Fried’s wacky charm.

And, had things gone a bit differently, he could have radically altered not just the crypto ecosystem, but, many longtime industry professionals feared, also the critical futures market that touches all corners of finance. FTX’s ambitions were grandiose: It wanted to carry out every aspect of customers’ crypto derivatives needs on its own, using algorithms rather than brokers to help clear trades.

“There are a few people in the industry that need to think hard about how someone can appear from nowhere and become the primary sponsor when others have been around for twenty-plus years,” Trading Technologies Chief Executive Officer Keith Todd said. “This is a wake up call. The adults need to run this industry. We need innovators, but also adults.”

Bankman-Fried didn't respond to requests for comment for this article. He spent part of his day Tuesday adding to a cryptic series of Twitter posts, noting that he’s been meeting in-person with regulators and working to see what he can do for FTX’s customers.

Not Satisfied

Just weeks ago, Bankman-Fried helmed the world’s second-largest crypto exchange, which was an offshoot of his trading firm Alameda Research.

Sam Bankman-FriedPhotographer: Ting Shen/Bloomberg
Sam Bankman-FriedPhotographer: Ting Shen/Bloomberg

He was surrounded in the Bahamas by his inner circle of similarly youthful disciples of effective altruism, a philanthropic and philosophic movement that tries to have the greatest impact by carefully spending money to solve problems. The cast included Caroline Ellison, Alameda’s CEO and Bankman-Fried’s occasional dating partner; Gary Wang, FTX’s chief technology officer; Nishad Singh, the exchange’s director of engineering; and Ramnik Arora, the head of product.

That save-the-world mentality was, in many ways, what drove Bankman-Fried and his acolytes. Though they got rich quickly through crypto, they weren’t just satisfied being power players in the nascent digital-asset world. The group of effective altruists understood money could solve almost anything.

Bankman-Fried worked behind the scenes to permeate traditional finance and change aspects of modern market infrastructure to his advantage. His FTX greased the palms of trading-world mainstays and quickly became a fixture in a staid industry, offering insight into just what kind of dominance he was working toward before it all went wrong.

FTX’s US arm, among the 130-plus entities that went bust, was striving to upend the way trading works for futures of all kinds. The derivatives, which are contracts that allow traders to lock in a set price for an asset at a future date, are a pivotal tool not just for financiers, but also for any business that might need large amounts of oil — think airlines — and for farmers, who are up against the caprices of weather and pests.

In crypto, by contrast, futures are a highly speculative instrument, allowing traders to bypass direct ownership of Bitcoin, Ethereum or Dogecoin and just wager on whether prices will go up or down.

Bankman-Fried was pushing to take out the middlemen in crypto futures trading — who are specifically tasked with offsetting risks.

FTX Came Dangerously Close to Upending Futures Markets
WATCH: Zhao Likely Sold FTT in Retaliation, Scaramucci Says" />

Consolidating Power

After buying a derivatives exchange in the US called LedgerX in 2021, FTX.US asked the Commodity Futures Trading Commission for permission to do something unusual: It wanted to execute all elements of Bitcoin and Ether futures trades, thus bypassing other exchanges, banks and other financial intermediaries.

At the heart of the proposal was margin — a favorite tool of the exchange’s users. FTX.US said it would post $250 million of its own money to shore up losses if buyers or sellers couldn’t uphold their end of a deal. The approach would consolidate power in the hands of FTX and the supposed sophisticated technological surveillance tools it had in place.

It was vastly different from the system used elsewhere in derivatives markets, requiring that members pitch money into a communal fund to cover defaults.

It won praise from a venerable group of financial industry titans. Fidelity Investments, Fortress Investment Group, Susquehanna International Group and Virtu Financial were among the hundreds who penned letters to the CFTC in support of Bankman-Fried's vision.

Read more: FTX Once Had Wall Street Heavyweights Sold on Derivatives Plan

The old guard of the derivatives industry, including heavyweights CME Group Inc. and Intercontinental Exchange Inc., and the FIA itself, were aghast at FTX’s brazen pitch and stunned at the public outpouring of praise.

The two exchange operators had their own motivations, of course: it could be a threat to their bottom lines, since keeping all those stabilizing intermediaries in place adds costs. But more urgently, as the two companies stressed to regulators in strident comment letters, it could also introduce undue risk into the whole marketplace.

Their comments, which are looking more prescient by the day, raised alarms about the ties between FTX and Alameda. The links between the exchange and the proprietary trading firm were just one way the proposed system could pose conflicts, they argued at the time.

US and Bahamian authorities are just beginning to untangle the extent of those connections and whether they harmed customers, as they hunt for clues to explain the ultimate source of FTX’s multibillion-dollar collapse. The Wall Street Journal has reported that Alameda took user funds to make loan payments as the crypto market crashed earlier this year.

FTX.US quickly yanked its application from the CFTC as Bankman-Fried’s empire descended into chaos.

Cornering Wonks

Until Bankman-Fried’s rival Changpeng “CZ” Zhao brought about FTX’s demise with a fire sale of the exchange’s native token, FTT, the curly-haired, video game-playing Massachusetts Institute of Technology grad was flying close to the sun.

Changpeng “CZ” ZhaoPhotographer: Benjamin Girette/Bloomberg
Changpeng “CZ” ZhaoPhotographer: Benjamin Girette/Bloomberg

In Boca Raton eight months ago, Bankman-Fried wandered the white halls of the resort in his khaki shorts and FTX T-shirt. Guests gawked and fawned over him. One attendee remembers angling for a handshake, only to be admonished by a handler, who said the crypto visionary didn’t like touching. Still, his affable, open-book attitude was out in full force. He happily answered questions on the sidelines as he bounced to and from meetings and panels.

Sponsoring FIA conferences was a way for FTX to corner the wonks in one place, familiarize them with FTX over a drink or two, and even get a chance to influence the content. Platinum sponsorship costs roughly $25,000 to $30,000, according to FIA’s website — chump change by crypto standards.

The events offered a way to come off as an approachable and legitimate player in derivatives, rather than an unknown platform throwing off cash from a penthouse in the Caribbean.

Unlike crypto, it’s a tough industry to crack. ICE’s origin story begins in 1997. CME’s roots extend all the way back to 19th century grain markets in Chicago. FIA conference attendees are fine print-readers whose jobs rely on predicting worst-case scenarios, including how market blow-ups happen. Regulators know their names and care about their opinions.

Walt Lukken, FIA’s president, said he hadn’t heard of Bankman-Fried until last year. When the crypto hero made the cover of and bought LedgerX, he said he started to pay attention.

“There are no regrets — we always are looking for innovators, people who are coming into our space to bring new ideas,” Lukken said during an interview in Chicago. “It's just incredibly disappointing if it turns out to be true that there is fraud coming out of this.”

To gain a stronger foothold, FTX.US strengthened ties with other disruptors. It invested in IEX Group Inc., the stock exchange that Michael Lewis detailed in . The two firms visited Securities and Exchange Commission Chair Gary Gensler together in March.

Though their partnership was based on crypto market structure, it offered an enticing pairing with an exchange that had challenged the mainstream and earned clout with regulators in Washington — a growing battleground for Bankman-Fried and his associates that may have ultimately sowed the seeds of his demise at the hands of Zhao.

Bankman-Fried’s schlubby look and disregard for norms irked more than a few people, including longtime CME CEO Terry Duffy. The two clashed in an heated discussion at the Boca Raton event that lasted more than an hour, Bloomberg previously reported.

Terry DuffyPhotographer: David Paul Morris/Bloomberg
Terry DuffyPhotographer: David Paul Morris/Bloomberg

Read more: Crypto Billionaire Rankles Wall Street With Futures-Trading Plan

It was largely brushed off back then. “All change creates tension,” said David Weisberger, who earlier in his career built trading systems for Morgan Stanley and Two Sigma and now runs crypto company CoinRoutes. Mark Wetjen, a former CFTC commissioner who was head of policy and regulatory strategy for FTX’s US arm at the time, mused that it's “just a natural human behavior to respond a certain way when something seems new or novel.”

Plumbing Purchases

Bankman-Fried’s efforts to expand FTX into the depths of financial market plumbing only grew stronger after Boca Raton.

As part of FTX’s buying spree when crypto markets were plunging in the spring, it bought a young clearing firm called Embed. Clearing firms are yet another piece of market structure that exist to keep trading risks in check, but that few pay attention to until there’s a reason.

One example of such a crisis: Robinhood Markets Inc.’s liquidity crunch during the runaway rally in GameStop Corp., which led to a Congressional hearing about what happened during the meme stock mania.

Bankman-Fried in May acquired a 7% stake in Robinhood. He spoke to people in his orbit about wanting to buy the whole company one day.

The fate of that Robinhood position is now in limbo. Bankman-Fried acquired it through an entity called Emergent Fidelity Technologies, which isn't listed in FTX's bankruptcy filings, though it was listed as an asset on FTX’s balance sheet. Still worth more than $500 million, it's likely to come up as FTX's more than 1 million customers look to recover some of their missing money.

Uneasy Relief

In the ground level exhibition hall at the Sheraton Grand Chicago Riverwalk, participants this week still can’t quite believe that they were so close to having Bankman-Fried again strolling through the hallways and once again stealing the show.

Instead, Bankman-Fried is facing a possible trip to the US for questioning — American and Bahamian authorities have been discussing bringing him stateside, with conversations between law-enforcement officials in the two countries intensifying in recent days as they probe his role in FTX’s implosion.

Read more: Sam Bankman-Fried Facing Possible Trip to US for Questioning

At the conference, Gerry Corcoran described a feeling of relief. Corcoran is the CEO of R.J. O’Brien & Associates, one of the futures market intermediaries that FTX.US was trying to skirt around.

“The current system in place for the futures industry is safe, robust, and proved over time,” Corcoran said in an interview.

Others noted FTX’s implosion is forcing people to look more closely at areas of the finance industry that are typically afterthoughts. 

“When an issue like this happens, it really shines a light,” said Alicia Crighton, a partner at Goldman Sachs Group Inc.

Near the short rib macaroni and cheese congealing in a chafing dish at the after-hours drinks reception, attendees wondered aloud what consequences Bankman-Fried and his associates, including Ellison, will face.

Despite the conference organizers’ best efforts, some of FTX’s fingerprints remained.

There’d been no time to reprint the programs. FTX appeared alongside CME and Barclays Plc on the back cover.

 

--With assistance from and .

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