BitMEX’s CEO Calls For Crypto Exchanges To Ditch Internal Market Makers

As the crypto landscape evolves, BitMEX’s acting CEO Stephan Lutz suggests that a change be made in the operational model of exchanges, specifically concerning their internal market-making teams.

Internal trading teams, often under the spotlight for possible conflict of interest, are now being questioned about their role in the modern cryptocurrency exchange structure. And Stephan Lutz, acting CEO and group CFO at BitMEX’s parent company, 100x Group, sees a shift in the landscape where the necessity for these teams is dwindling.

The Changing Role Of Internal Market Makers

According to Lutz, the abundance of High-Frequency Traders (HFTs) and proprietary trading firms currently operating could adequately replace the function of internal market-making teams. These external entities can effectively ensure liquidity, bridging the gap when an imbalance occurs between buyers and sellers.

BitMEX itself previously operated an internal trading entity, Arrakis Capital, which was a major internal market maker. However, today, Arrakis plays a far more limited role, functioning as a treasury desk with a small team.

This transition, as Lutz explains, is a result of an increase in external liquidity providers, making the need for internal market makers less critical.

Notably, the evolution of Arrakis Capital offers a blueprint for Lutz’s vision. Now separated from BitMEX both organizationally and technologically, Arrakis handles a narrow set of functions such as converting commission fees into fiat currency, hedging BitMEX’s token exposure, and making markets for BitMEX’s token BMEX, which lacks sufficient liquidity for external market makers.

Lutz clarified that while the treasury desk makes a modest return, it lost money last year, demonstrating the restrained role it now plays in BitMEX’s operations.

The Road Ahead For Crypto Exchanges

Although the notion of internal market makers was more common during BitMEX’s early days, Lutz notes that this practice has been changing. With increased scrutiny over exchanges with trading teams post-FTX fallout, the distinction between treasury functions and internal teams operating more like hedge funds is becoming paramount.

Lutz identifies key factors to distinguish benign internal trading teams from potentially problematic ones. Questions around the separation of client and house funds, access to data that could potentially facilitate front-running, the ability to manipulate markets on the exchange, and the fee structure can all serve as indicators of potential conflicts of interest.

Furthermore, as crypto exchanges continue to mature and adapt, Lutz’s insights underscore the need for operational transparency and the continuous evolution of practices to keep pace with the market dynamics.

Regardless of the several warning in the industry, the crypto market is currently experiencing a bullish trend. Over the past 24 hours, more than $40 billion has been added to the global crypto market value bringing the total market up by nearly 4% with a value of $1.2 trillion. This surge in influx follows Bitcoin’s spike to above $30,000 over the same period.

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