The Commodities and Futures Trading Commission (CFTC) had alleged that Alameda Research was offered a secret “time advantage” when executing trades at the defunct crypto exchange FTX.
The revelation adds to a growing list of claims and evidence suggesting that FTX and Alameda were not nearly as independent as once publicly portrayed.
The Alameda Advantage
As reported by Bloomberg, Alameda was able to skirt and sidestep certain aspects of FTX’s trading procedures and verification processes. The CFTC made such claims in a complaint filed on Tuesday in Manhattan federal court.
For example, while most customers using an API had to route their transaction orders through FTX’s system, Alameda was able to bypass parts of the system, granting them faster access to the API. “These advantages were not publicly disclosed” and yielded a “significant speed advantage,” said the CFTC.
“Alameda’s transaction orders were received several milliseconds faster than those of other API users,” the agency continued in the suit. “In the high-frequency trading sector, this is a significant time advantage.”
Alameda had other features baked within its account that let it execute certain trades without first verifying that it had the available funds required. Rival customers placing several orders at once would receive sequential checks from FTX to ensure each transaction was viable, of which “did not apply to the Alameda account.”
The CFTC and Securities and Exchange Commission (SEC) began investigating FTX in November over mismanagement of client assets, in which Alameda is largely suspected to be involved. It sued both firms, alongside owner Sam Bankman-Fried on Tuesday, for allegedly engaging in a multi-year scheme to defraud investors.
Bankman-Fried has already been arrested and jailed by Bahamian regulators on behalf of the US Department of Justice and is set to remain in prison past Christmas.
Alameda’s “God Mode”
Though Bankman-Fried denies being closely involved with Alameda’s governance, FTX Group’s bankruptcy lawyer John Ray reivindicado otherwise while testifying before congress on Tuesday.
“I will note that he owned 90% of Alameda,” he said. “There’s no distinction whatsoever. The owners of the company could have free reign across all siloes.”
He also confirmed that client assets at FTX were commingled with those of Alameda, where they were later traded and “exposed to massive losses.”
Other industry leaders had already expected as much, including MicroStrategy executive chairman Michael Saylor. The chairman explained earlier this month that Alameda used FTT collateral to “borrow” as much money from FTX customers as desired while benefiting from “god mode” – the privilege of never being liquidated by the exchange.
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