FTX Looks to Shake up Futures Market With Tech That Renders Margin Calls Obsolete

U.S. cryptocurrency exchange FTX is seeking approval from the Commodity Futures Trading Commission to offer Bitcoin futures.

By doing so, the three-year-old exchange founded by Sam Bankman-Fried could potentially set a new precedent in the futures markets.

Rather than utilize brokers, the exchange plans on automatically monitoring the market, 24 hours a day, seven days a week. It would then use this near-streaming data to update debit client balances nearly instantly, which could result in many potentially liquidated accounts. 

The removal of brokers from the transaction fundamentally alters the mechanics of futures trading. While some defend the more traditional system, others believe FTX’s plan introduces advanced technology that could one day apply across the futures market.

Proposed change to margin rules

Futures trading typically involves leveraged trading, with traders initially putting down a small fraction of the overall value of their position, typically understood as “margin.” Margin is critical to leveraged trading, acting as collateral if things go south. Currently, when a camel’s back seems one straw away, a broker would ask a trader to shore up the trade with additional funds by a certain deadline, known as “margin call.” 

Meanwhile, on cryptocurrency exchanges, such as FTX and Binance, traders deal directly with the exchange rather than through a broker. Additionally, margin requirements for products like Bitcoin futures on these platforms are constantly being updated. 

Consequently, if a user’s margin falls below a predetermined level crypto platforms automatically begin unwinding positions. While a user might receive notification of the liquidation, crypto markets are often so volatile that positions can be wiped out very quickly.

FTX kick-starts debate

Since opening consultation with the Commodity Futures Trading Commission (CTFC) in March, the FTX plan has ignited a fierce debate over its potential effect on the futures market. Last year, the United States accounted for $29 billion in contracts within the global futures market.

Those defending the legacy format believe it provides a vital “breathing space” to make important decisions or find extra cash. Others think the innovation fosters competition, democratizes futures trading, while protecting smaller investors from accumulating unaffordable debts.