FTX CEO Testifies at House Hearing; Defends Plan to Automate Futures Market

FTX CEO Sam Bankman-Fried testified before the House Agricultural Committee on Friday following a proposal to regulate futures markets with automated tools.

Amidst skepticism, FTX CEO Sam Bankman-Fried made his case for using computers to perform margin calls on leveraged positions at a hearing on Friday in Washington, D.C.

In his testimony, Bankman-Fried testified that the new automated system would be healthy for markets.

“It would bring competition and innovation,” he said. “It would bring liquidity to the U.S. marketplace and options to U.S. consumers.” The new system would replace brokers making margin calls with a 24/7 computer service.

“Rather than choosing between liquidating a position too early over fear of what could happen over the next two days of exposing one’s self to systemic risk, there can be a real-time, more precise judgment about the health of the position,” he lobbied.

Terry Duffy, a top executive at the CME Group, presented an alternative view, bemoaning potential impacts on the market and arguing that current risk frameworks are proven, doing away with the need for automation.

“Automatic liquidation could exacerbate volatility and create dramatic price moves during times of turbulence-with the potential to build losses on top of losses and destabilize markets for all participants.”

FIA argues need for human intervention

Duffy echoes statements made by the Futures Industry Association (FIA) on May 11, 2022, which said they did not know how reliable the algorithms would be in mitigating risk, arguing the need for human interventions.

“During market turbulence, immediately liquidating a large participant during cascading markets can…add to market volatility and may cause further defaults,” the body said, saying they highly value the judgment of finance specialists when making liquidation decisions.

Offering leveraged futures means that investors can enter significant positions on the market with a minimal investment called margin, borrowing the rest from the exchange.

FTX’s new product would need customers to deposit collateral in their FTX accounts, ensuring enough funds to cover their margins.

Currently, futures commission merchants (FCMs) collect margins and request more money overnight to support positions or help customers with their own money. FCMs also contribute to intermediaries between buyers and sellers called clearinghouses to share losses in the event of a default.

The new automated system would calculate margin levels every thirty seconds, liquidating positions or selling off the margins in equally divided portions rapidly if margins become too low. There would be other backup liquidity providers in a worst-case scenario.

The FIA called FTX’s plan “innovative” and “transformative,” while cautioning the CFTC to do its homework before approving the proposal. The CFTC opened up FTX’s proposal for public comment with a deadline that expired on Wednesday as a precursor to the House Committee hearing on Friday.

Big push into futures market for crypto companies

There has been a push by major crypto exchanges such as Coinbase and Crypto.com to establish themselves in the highly-regulated futures market.

In January, Coinbase agreed to purchase FairX, a Chicago futures exchange. Last year, FTX US purchased LedgerX last year.

FTX US’s play was to buy up a company with a license to operate in the United States. “In the U.S., the crypto exchanges can’t offer leverage on spot crypto without being a regulated futures commission merchant,” said Rosario Ingargiola, head of Bosonic, a crypto settlement company serving institutional investors.

“It’s a big part of why you see larger crypto exchanges buying [Commodity Futures Trading Commission]-regulated platforms that allow the offering of derivatives like options and futures to retail clients because there is a huge demand for leveraged products in the retail client segment.”

On Friday, Bankman-Fried announced he purchased a 7.6% stake in Robinhood Markets, which caused shares to surge up to 33 percent.

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