FTX's Unique Design

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FTX runs a unique margin and risk engine, which is natively blockchain based, real-time, cross-margined, and automated.  This margin engine is built fully in-house, and forms part of the backbone of a fully reimagined exchange.

 

Real-time

One of the large problems that traditional margin systems run into is settlement delays.

Take, for instance, the CME.  It can take a day to fund your account there--wire transfers going through prime brokers.  The exchange also only runs on weekdays--which is still better than equities exchanges that only run during daylight hours.

This means that there are sometimes 72 hour long periods where a user can't actually fund their account.  If you issue a margin call on a Friday, it will be days before it could be met.  And so exchanges will often give days for clients to meet margin.

And even if a client doesn't meet a margin call, their positions can only be closed down when the exchange is open; sometimes that takes days as well.

And so if you're a traditional margined exchange, it can day half a week to actually issue a margin call, and then if necessary close down a client's positions.

And meanwhile, markets are moving.  Over a 3 day period, markets could move 50% in extreme cases; if this makes a client's account negative value, someone is stuck footing that bill.  So what can you do?  Really you're left with three options, none of which are ideal:

(a) require 50% margin on all positions

(b) pass the buck: rely on third-party prime brokers who know their clients, and let them figure out the mess

(c) charge huge fees to subsidize an insurance fund that keeps having to bail out net negative accounts

FTX changes this by being a natively real-time exchange.

This starts with the assets.  FTX holds its users assets, which is necessary to be able to have full real-time control and measurements of them.  And crucially those assets are blockchain-based.  This means that FTX can handle deposits and withdrawals of assets 24/7, all at the speed of a blockchain: much faster than a wire transfer.  So users can deposit cryptocurrencies, stablecoins, and even stock tokens 24/7 with very quick settlement, meaning they can meet margin calls in minutes instead of days.

Next, FTX runs 24/7.  In addition to generally offering more service to users, this means that, if a liquidation has to occur, it can be executed at any time; we don't have to wait for the next weekday.

And, finally, FTX's risk engine is fully automated.

All of these mean that, if a client gets close to hitting their maintenance margin, FTX can issue a margin call; potentially receive top-up funds from a client; let them close down their positions; and if none of the first three happen, liquidate that client's positions, all in a matter of minutes.

This means that FTX's risk engine doesn't need to worry about bitcoin moves over a 3-day period; it just has to think about moves over a 3-minute period.

This allows FTX to:

(a) require substantially less margin

(b) liquidate substantially less aggressively

(c) allow clients to top-up in real time

All without endangering funds.

 

Cross-margin

Another cool feature of FTX's risk engine is that it's all cross-margined.  Unlike other venues where each position you take is completely isolated from your others and requires separate maintenance, on FTX you can hold all of your positions and balances in one wallet.

This means you can hold USDC, BTC, ETH, TSLA, and EUR in your wallet; and using any of them, you can trade any of the futures or other margin products on FTX.

This is helpful for three reasons:

(a) it eliminates the hassle of shuffling funds between different internal accounts for different products

(b) it gives the users total flexibility on what assets to use as collateral

(c) it prevents liquidations in cases where the client had other types of assets in the wrong wallet

And, like above, this is made significantly easier and more powerful because nearly all of the assets on FTX are blockchain-based, allowing quick, easy settlement.

 

Reducing middleman fees

In the traditional financial waterfall, a standard retail-initiated trade may have to separately pay fees to a broker, PFOF firm, dark pool, clearing entity, prime broker, stock loan desk, and exchange, all for the one trade.  These fees add up, as to the spreads and latency.

FTX removes the middlemen: we have our own built mobile app, GUI, API, borrow/lending book, and wallet; all freely available to all users.

 

Fair Access

One last point worth making about FTX: it gives fair access to all participants.

All of our public marketdata is free and available to anyone via API.  And with FTX, there is no need to pay the exchange more for a faster line: we are located in AWS with equal access to users large and small.  

Furthermore, we don't force our users to go through any intermediaries--FCMs, third party prime brokers, etc.  This means that there is no information leakage to third parties; no race to liquidate; no special relationships necessary; and no reliance on the tech or latency of a third party.

This is in contrast to many traditional exchanges that have a pay-to-play model with more expensive subscriptions leading to faster connections, and brokerage relationships gating access to markets.

 

One tech stack

The thing that underlies all of the above is that FTX is a full-stack product.  We've built the entire flow from deposits to trades to margin in house, and it all composes seamlessly.  Furthermore, we've built the asset system on blockchain rails, allowing for free, fast, cheap, 24/7 flow of assets.

FTX isn't built in exactly the same way traditional exchanges are.  That's a feature, not a bug.

 

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