We have recently updated our Terms of Service to explicitly clarify the relationship between BitMEX the trading platform, and an affiliated entity that engages in market making.
BitMEX has a for-profit trading business that, among other things, transacts in products traded on the BitMEX platform. The trading business primarily trades as a market maker. The trading business is organised to be separate and distinct from the platform business. Specifically, no front office personnel are shared between the trading business and the platform, the trading business operates from a separate physical location, and the trading business does not have access to any platform order flow, execution, customer or other information on terms that are not otherwise available to any other platform user. In addition, unless otherwise set forth in the terms of a specific BitMEX product, the trading business receives access and trading privileges only on the same terms as are available to any other user.
Why Market Make?
Early on we discovered that market makers are very fickle. They only want to invest the time connecting to a trading platform that already has flow. What they don’t want to do is try out a new exchange where they must expend resources connecting only to have no takers. Given trades must be collateralised, this reduces their returns.
In order to entice others to provide liquidity, we funded an entity that would quote as soon as a new product listed. As the product became more liquid, this entity would scale back it’s quotes and focus on another product with lower liquidity on the BitMEX platform.
Right now the activity of this affiliated entity is concentrated on the altcoin contracts. XBTUSD and the quarterly Bitcoin / USD futures contracts have plenty of liquidity, and new market makers join every day to beef up those orderbooks. Mission accomplished … for now.
Being able to immediately support a new and illiquid product allows us to experiment with products that other platforms without an anchor market maker cannot. It also speeds up the process to obtaining other 3rd party liquidity providers.
How Do We Align Incentives?
The trading entity is a for-profit operation. However, their earnings are comprised of a service fee paid by the business, that is the BitMEX trading platform. In terms of trading PNL, the market making desk’s goal is to be breakeven.
If the desk is making too much trading PNL, the business will instruct them to tighten spreads and increase size. As a franchise, BitMEX succeeds because of greater trading volumes, not because of the market making desk’s trading PNL.
The market making desk earns the most if the exchange earns the most. That also means that dishonest and manipulative behaviour on the part of the market making desk is not tolerated. As you saw mentioned, the desk sits in a separate physical location. They also have no better information or access than any other trader on BitMEX. If traders feel that the platform is not fair, they will leave, and no one will get paid.
Our lead outside counsel is fully aware of the operation and advises us on best practices to ensure that we place the interests of BitMEX customers first.
What Activities Does The Desk Engage In?
The primary trading activity is providing two-sided liquidity on selected BitMEX products. The desk’s current focus is on increasing the liquidity on the altcoin contracts. The desk will also be the anchor market maker for the UPs and DOWNs products.
The desk also trades OTC with various counterparties globally.
As mentioned earlier, the desk does not engage in manipulative behaviour. The desk does not front-run customers. The desk does not manipulate either the market on BitMEX or the underlying exchanges for the purposes of stop loss hunting, or causing cascading margin calls.
None of this behaviour has occurred in the past, and if such behaviour is discovered, those responsible will be terminated immediately for cause.
Who Runs The Desk?
The head trader is Nick Andrianov. He is a former Deutsche Bank equity flow and exotics options trader. Nick and I have known each other for over ten years. His integrity is unquestionable.
Nick receives the business objectives from various senior members of BitMEX. The business and the market making desk work closely with the express goal to make every single BitMEX product as liquid as possible.
Trading losses incurred by the market making desk will not affect the solvency of the BitMEX trading platform.
As stated above, the market making desk sits within a separate entity. Their goal is to provide liquidity to BitMEX and the wider crypto capital markets.
– Arthur Hayes, CEO and co-founder