1/ How do we explain FTX's $10 Bn in losses? Where did the $2 Bn in venture funds go?

My working hypothesis is that FTX was a fraud even prior to recent events and as far back as 2021.

#SBF will go down in history as a fraud larger than Bernie Madoff. 🧵
2/ Alameda was indispensable to FTX. Crucial for this analysis...

FTX must inventory customer funds 1:1.

How then to match buy & sell orders?

Both orders would have to arrive at the exact same time, the exact same size, and agree on the exact same price. That never happens.
3/ Alameda fixes this problem by serving as the Designated Market Maker (DMM).

Under US securities law, the DMM is obligated to make a market under any market conditions.

The DMM stands ready to offer their own inventory of securities to the market, and stands ready to buy.
4/ FTX is a gift for Alameda. FTX is gathering and attracting tons of uninformed retail order flow for Alameda to monetize by trading against. Similar to PFOF

Alameda is a gift for FTX. Alameda offers valuable liquidity to customers. Otherwise, the exchange would have no volume.
5/ That exclusive FTX/Alameda relationship conferred a major advantage to Alameda.

Alameda could make a market with limited competition against uninformed retail order flow.

Alameda would simply take the other side of random buy & sell orders and make money.

So far so good.
6/ A good DMM or HFT can make money nearly every day.

You are constantly turning over the portfolio. You make more money in volatile markets.

It requires little capital. It's a great business. That business attracts competition.
7/ Here's where things start to go wrong.

Imagine the Alameda is the House. The house has a slight 'edge' - a slight positive expectancy.

Over time, the skillful poker players start to show up. Jump, Wintermute, and smaller shops.
8/ The HFT game rewards whomever has the lowest latency and fastest data.

FTX's competitors invest in hardware: co-located servers, ultra-fast flexible gate programming arrays (FPGAs), and data. They compile in C.

FTX spent millions on AWS. They code in Python. Too slow...
9/ Side note: Great HFT firms will invest up to billions in proprietary high-speed data links such as microwave technology.

The mere curvature of a fiber optic cable creates a disadvantage for an HFT firm. The bending of the speed of light is unacceptable.

Speed is everything.
10/ FTX & Alameda now flip from a slight positive expectancy to a slight negative expectancy.

They are the sucker at the poker table.

They start to bleed. They lose a small amount of money per trade - on millions of trades.

At the same time, they are growing customers. Why?
11/ The same trading strategy that might not work profitably at at Coinbase would make profit at FTX Global.

It's was known known that FTX Global had the best 'vig' in town if you were an HFT.

FTX/Alameda was bleeding.

12/ At its core, the quotation service that FTX offered was broken. It was quoting stale prices.

That exposes FTX Global to getting 'picked off' by faster traders with lower latency.

'Picked off' means an informed traders spot the mis-quotation and profit at Alameda's cost.
13/ This article from @JeffKauflin reports the FTX & Alameda lost $3.7 Bn *before* 2022. [!!]

Before Luna. before 3AC. Before credit contagion.

That's nearly 2x capital as compared to dollars raised.

They may have been insolvent already.
14/ At the micro level, Alameda is creating liquidity at FTX, but getting stuck with bad trades.

Here's one example.

FTX clients took a levered bet on Mobilecoin. Alameda takes the other side. Alameda shoulders a $1 Bn loss.

15/ Caroline acknowledges in March 2021 that @SBF_FTX shifts their strategy from market-making to taking bigger, riskier, directional bets.

Around this time the GBTC discount introduces itself.

We're in a new market regime different from 'up only'.

16/ The bear starts. A dump on Alameda accelerates as tokens value declines

Alameda is now facing a 'one-way' market. The DMM is great in a sideways volatile market

If the market is dumping, and you hold billions of long illiquid assets, and you are the DMM - you are toast
17/ FTX creates an illegal backdoor - a secret exemption Alameda has to FTX's standard margin and liquidation rules. (This is called 'Self Dealing' in Securities law parlance.)
18/ Genesis over the summer calls in a $2.6 Bn loan.

Alameda is at risk of getting a margin call from creditors BlockFi & Voyager.

(@LumidaWealth describes this contagion effect in the FTX whitepaper released a few weeks ago.)
19/ What does @SBF_FTX do?

FTX puts in a bid to buy its creditors Voyager and BlockFi with its worthless FTX equity.

That bid staves off a margin call. It also gives FTX a shot at access to customer funds.

I describe that deception here:

20/ One example of the consequence of Alameda forced to provide liquidity, is CZ selling FTT token in size.

This is CZ calling Alameda's bluff.

@carolinecapital now offers to buy at $22.

Of course, at this point they are 'all-in' and its over.

21/ Alameda has no choice but to defend the price of the FTT token.

If FTT collapses, Alameda gets a margin call.

Alameda can't afford a default on loan against FTT collateral. (This is already covered elsewhere.)
22/ Alameda as DMM is forced to defend the intrinsically worthless FTT token.

Any irony here - they are selling good quality stablecoin to buy their version of fiat (FTT) and defend their fraud scheme.

@cz_binance seems to say 'If you say FTT is gold, I'll sell all you want'
23/ Each exchange of FTT and stablecoin is nominally a value-for-value fair exchange.

But the Alameda balance sheet is deteriorating in true economic terms. The FTT price was artificially supported to hide this.

(Prosecutors at @TheJusticeDept call this 'market manipulation'.)
24/ Let's zoom out.

You start with a profitable link between Alameda and FTX. Competition enters. FTX/Alameda is bleeding.

Alameda pivots (VC+pre-mine, directional trades, etc). FTX needs to save its Alameda to maintain an exchange. SBF crosses the line and taps customer funds
25/ What's new here?

- FTX & Alameda were mutually indispensable. Incompetency evolved to fraud & market manipulation
- The fraud likely started earlier - as far back as 2021
- FTX 'exported' VC & customer funds to skillful counterparties via trading

Please give a ❤️& RT 🙏
26/ Parting thought…FTX’s flawed execution model only works with net new customer funds or new VC money.

That is the definition of a Ponzi scheme.
clarification: FTX Global nor Alameda are regulated in the US. The DMM is meant to illustrate an analogy to a type of concept. Plus people can research those terms further. The US markets have encountered & classified many scenarios/role types…
@BillAckman walked back his comment. It takes courage and humility to admit a mistake.

What about @kevinolearytv?

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