Markets
A conversation with Laurent Benayoun, CEO, Acheron Trading – DL News
In a 2022 blog post, Acheron said he expects the long-term health of the market to improve through consolidation and elimination of weaker market makers. How has the crypto market making landscape evolved since the FTX meltdown?
In every bull market, greed leads to reckless risk-taking. When markets stop working, losses from risky bets pile up, exposing conflicts of interest, excessive leverage, market manipulation, and other harmful practices. Finally, entities that take excessive risks in a bull market get into trouble when they have poor risk management practices. Their failure further exacerbates the effects of a bear market. Acheron has always emphasized risk management and continuity as a concern throughout the business cycle.
Traditional markets experienced a surge in retail trading during the January 2021 meme stock bubble event. In the wake of the event, conflicts of interest were highlighted among major market makers and a series of market reforms were proposed by the SEC to improve the transparency of market makers. As the cryptocurrency market experiences its own “memestock” event cycles, with various dog and frog-inspired tokens skyrocketing to billion-dollar market capitalizations, as does the role of cryptocurrency market makers and the exchanges they list Do these coins compare?
Memestocks and memecoins don’t have much to do with each other, at least from what I can see. In fact, there are significant structural differences between the trading and crypto markets. In traditional markets, memestocks are still shares in real companies. Trading may be halted at the broker’s discretion due to funding/clearing house restrictions. Institutions may be massively shorting, which could lead to a short squeeze. Ultra high frequency trading leads to payment for order flow being ultra important for market makers (MMs). None of this really applies to memecoins. In crypto, MMs bring a special asset to the market, implying different pre-market modeling. Shorting is limited, and institutions are not massively shorting, given risk management practices and knowing what volatility in crypto is like anyway. True co-location is rare: we’re talking virtual private networks at most. Exchanges witness sporadic but significant volume and price actions in these markets. Exchanges also act as brokers, matching engines, and clearinghouses all at the same time.
How does Acheron address ethical considerations and potential conflicts of interest in market-making practices such as short selling client tokens?
Externally, we provide a portal for all clients, even for what would be considered “distance relationships”, such as those in the loan and purchase option model. The portal provides real-time metrics – rather than retrospective reports – such as liquidity, number of orders, market share, fulfillment volume and more. Internally, we have established a very strict commercial policy for all employees and their families. This commercial policy includes blackout periods, approval and supervision of trading for compliance and prohibits all forms of illicit market practices, such as abuse of privileged information.
You have stated that Acheron is willing to forgo profits in its mission to combat negative perceptions of market makers by acting in good faith and providing transparency. What strategies does Acheron advocate to ensure the sustainability and integrity of market making activities?
Parasitic MMs take a probabilistic approach: 95% of markets trade below the listing price 180 days after the primary listing. Their playbook is simple: short sell as much of the issuer’s loan as possible, forcing selling pressure to exceed buying pressure, killing momentum and price discovery. This creates a self-fulfilling prophecy of downward price movements, allowing parasitic MMs to repurchase tokens initially sold for an immaterial amount and pocket the difference. This playbook is deeply harmful to all market participants: issuers (witness poor price performance), investors (have to wait for vesting unlocks to sell an asset that is falling in value), and the early buyer community (often suffering the biggest losses). Acheron’s symbiotic approach involves a fully automated long-range delta-hedging strategy. In other words, Acheron locks in the value of the call options initially and profits from the volatility.
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Automated Market Makers like Curve and Uniswap have been a cornerstone of DeFi and have played a large role in the industry’s growth. How should PMMs and DMMs adapt their strategies to remain competitive in an increasingly decentralized landscape?
AMMs are commonly confused with competitors to MMs, when in fact they provide additional hedging venues and often contribute to making markets more efficient in their own way. MMs simply develop new strategies, representing interesting research and technical challenges. As trading flows continue to shift to the advantage of DEXs, as has already happened, DEXs will attract regulatory scrutiny, especially when it comes to Know Your Customer (KYC) and Anti-Money Laundering (AML) regulation. Enforcement action on decentralized services is already underway. How would the introduction of hybrid exchanges (DEXs that incorporate features of the CEX platform, e.g. limit order books) change the participation of market makers in the cryptocurrency markets? MMs must continually adapt, as they always have. For example, Acheron Trading has integrated some of these hybrid exchanges (e.g. one with a CLOB, a fast matching engine, and on-chain settlement layer). Acheron Trading has also been a great liquidity provider for these venues. Again, this presents an interesting technical/research challenge and is consistent with the previous observation about the lack of strict dominance of DEXs over CEXs.
What role do you foresee AI playing in market shaping, for example by detecting and preventing market manipulation tactics?
While machine learning (ML) can certainly help with pattern recognition, financial markets, in general, are notorious for their significant noise, and crypto markets, specifically, may not have enough data to prevent or mitigate overfitting. I’m not sure to what extent AI is used in locating funds, but it can streamline the efforts of government agencies and their service providers to efficiently locate illicit activity in the chain. Only the future will tell what the viable applications of these technologies will be.
With continued advances in quantum computing and the increasing possibility of large quantum mining operations, how real is the risk of a 51% attack on the Bitcoin network?
If the quantum advantage is achieved in unstructured searches, then the 51% threat could become very real if the network does not adapt. That said, it might not make sense to try to do this from a game theoretic perspective, as the entire network would instantly lose its value. Furthermore, it is challenging to assess how close we realistically are to achieving quantum advantage, as some problems in the field are undermined despite advances. After all, BTC is a technological solution that needs to evolve over time to retain its value, unlike gold or other forms of money.