FTX Is Building Lots of Sophisticated Markets Few Traders Use

Cryptocurrency exchange FTX has launched eight unique index futures and volatility markets in less than 12 months. But enticing sophisticated traders to use these novel products has proved challenging.

At the time of publication, Antigua and Barbuda-based FTX supports 115 different cryptocurrency futures markets. BitMEX, currently the largest cryptocurrency derivatives exchange by open interest, supports 23. FTX’s unique futures markets, including decentralized finance and “shitcoin” perpetual futures, rank in its top 25 traded markets by 24-hour volume.

Since August 2019, when FTX launched its altcoin index futures, the product strategy for these innovative markets has been to build and launch rapidly to capitalize on trends within cryptocurrency communities. “A lot of these products are really important to launch while popular,” said CEO Sam Bankman-Fried.

The ostensible popularity of these indices’ underlying assets, however, hasn’t always translated into equivalent demand from professional traders to enter the new markets. In fact, these indices report a tiny fraction of the trading volume for FTX’s bitcoin and ether futures markets. A one-week average of daily trading volume for FTX’s top indices shows none of them broke above even $4 million in traded volume.

“Each of these new products are fascinating and potentially very attractive hedging instruments in the future,” said Jeff Dorman, the chief investment officer at Arca. But at present, larger investors may be precluded from “fully utilizing” FTX’s innovative products due to “low liquidity and low underlying AUM per product.”

“With that said, if FTX is able to continue growing its user base and onboards more market makers, liquidity will naturally flow towards these products and funds will follow,” Dorman added.

FTX’s unique futures markets are designed for both retail speculators and professional traders, according to Bankman-Fried. But to some traders, the exchange appears to be primarily designed for professional algorithmic and quantitative traders.

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“FTX is a battlefield for quants,” said Nik Yaremchuk, an independent quantitative bitcoin trader. To Yaremchuk, the exchange’s user interface alone signals that it has “few retail traders.” He added that roughly 90% of all FTX trades are also executed via its application programming interface (API). Traders use an exchange’s API to programmatically enter and exit trades instead of completing the trade manually via an online web interface. According to Bankman-Fried, that number is closer to 75 percent.

Snowball effect

Generating liquidity takes time but can have a snowball effect once a new market gains momentum. One solution to boosting a new market’s liquidity is having other exchanges launch similar markets. This generates interest among their own users and creates opportunities for arbitrage trading. But other exchanges could be “worried about the lack of liquidity” on FTX’s markets, and hence “they don’t launch these products,” said Qiao Wang, an independent bitcoin trader, previously a quantitative trader at Tower Research.

Another obstacle, according to Bankman-Fried, is the difficulties of coordinating the product designers and initial market makers “on really short notice” for these popularity-driven product releases.

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FTX doesn’t seem worried about the liquidity in its new, eye-catching products. “Over time, more and more liquidity providers start to provide,” said Bankman-Fried. “Because the bulk of maker orders are sent by automated bots, it takes some time for many market making firms to add a new product to their models.” Gradually, more firms will add these markets to their “repertoire” and, thus, provide more liquidity, he told CoinDesk.

According to Yaremchuk, the innovative futures markets on FTX are both great “tools” and “toys” for quantitative traders. But to date, these products aren’t as attractive or useful as they could be due to low liquidity.