Crypto Exchange Dilemma: Internal Market Makers or Transparency?

In the world of crypto exchanges, the use of internal market-making teams has become a contentious issue in recent years. Internal market makers are teams of traders that work for an exchange to make a profit on the trading activity that takes place on the exchange. Some insiders argue that these teams can help contribute to the liquidity and stability of an exchange’s markets, while others believe they can create a conflict of interest that could harm investors. In this article, we’ll take a closer look at the debate over internal market makers by examining the views of two prominent figures in the crypto exchange industry – BitMEX CEO, Stephan Lutz, and Crypto.com’s internal trading teams.

BitMEX CEO’s statement on internal market makers

Stephan Lutz, CEO of BitMEX, has been a vocal opponent of the use of internal market-making teams on crypto exchanges. In an interview with The Block, Lutz argued that exchanges that make money from proprietary trading should let go of their internal market-making teams. He went on to state that there are enough high-frequency trading firms and proprietary trading shops in the market that can perform the function of proprietary trading and market-making teams, making internal teams unnecessary. Lutz’s argument is based on the idea that internal market makers can create a conflict of interest that harms investors. When an exchange’s internal market maker has access to all of the exchange’s trading information, it can use that information to its advantage, potentially at the expense of the exchange’s users. This can create a situation where the internal market maker prioritizes its profits over the interests of the exchange’s users.

Concerns have arisen over Crypto.com’s internal trading teams

Crypto.com, a popular crypto exchange, has been the subject of criticism due to its use of internal trading teams. The exchange has a team of traders who work to facilitate tight spreads and efficient markets on its platform. While the team has publicly stated that it treats its actions the same way as any other third party, many critics believe that the team’s actions could create a conflict of interest. In response to these concerns, a spokesperson from Crypto.com stated that the trading team ensures that the exchange remains risk-neutral by hedging these positions on several venues. This means that if the internal team takes a position on a particular asset, it also takes offsetting positions on other exchanges to ensure that the exchange remains risk-neutral.

Comparison with BitMEX’s past allegations of running an internal trading team

BitMEX itself faced allegations of running an internal trading team to make profits several years ago. At the time, the derivatives exchange was accused of using Arrakis Capital, an internal market maker, to trade against its own users. While BitMEX denied the allegations, it separated Arrakis Capital from the exchange to avoid the appearance of impropriety.

The use of internal market makers by crypto exchanges has become a controversial issue. While some believe that internal teams can contribute to the liquidity and stability of an exchange’s markets, others argue that they can create a conflict of interest that could harm investors. BitMEX CEO Stephan Lutz has been a vocal opponent of the use of internal teams, arguing that exchanges that make money from proprietary trading should let go of their internal market-making teams. Crypto.com has defended its use of internal trading teams, stating that its team exists to facilitate tight spreads and efficient markets on its platform. Ultimately, the decision of whether to use internal market makers or third-party firms will depend on a variety of factors, including an exchange’s priorities, its risk tolerance, and its commitment to transparency and fairness.

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