In this episode I speak with Sam Trabucco from Alameda Research. Alameda manages over $100mm in digital assets and trades between $600mm and $1.5bn per day.

We begin our conversation with a discussion around the features that distinguish crypto markets from traditional markets. What becomes a recurring theme in the conversation is how decentralization and fragmentation present both an opportunity and a challenge.

Sam provides some color into the easiest and hardest alpha he’s earned, including exploiting a spot arbitrage with a US dollar, Bitcoin, and Japanese Yen triangle trade. But not all trades are that complicated: sometimes, it’s just buying Dogecoin when Elon Musk tweets about it.

We spend the back half of the conversation discussing operational issues such as managing collateral, block-time versus clock-time, transaction costs, exchange risk, and regulatory risk. For a highly systematic team, Alameda spends a good deal of time trying to qualitatively judge where the juice is worth the squeeze.

I found this chat to be incredibly insightful into the world of crypto trading, and I hope you do too. Please enjoy my conversation with Sam Trabucco.


Corey Hoffstein  00:00

All right, let’s do it. 321 Hello and welcome everyone. I’m Corey Hoffstein. And this is flirting with models, the podcast that pulls back the curtain to discover the human factor behind the quantitative strategy.

Narrator  00:20

Corey Hoffstein Is the co founder and chief investment officer of newfound research due to industry regulations. He will not discuss any of newfound researches funds on this podcast all opinions expressed by podcast participants are solely their own opinion and do not reflect the opinion of newfound research. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of newfound research may maintain positions and securities discussed in this podcast for more information is it think

Corey Hoffstein  00:51

This season is sponsored by simplify ETFs simplify seeks to help you modernize your portfolio with its innovative set of options based strategies. Full disclosure prior to simplify sponsoring the season, we had incorporated some of simplifies ETFs into our ETF model mandates here at New Found. If you’re interested in reading a brief case study about why and how visit with models and stick around after the episode for an ongoing conversation about markets and convexity with the convexity Maven himself simplifies own Harley Bassman. In this episode I speak with Sam buco from Alameda research, Alameda manages over $100 million in digital assets and trades between 600,000,001 point 5 billion per day, we begin our conversation with a discussion around the features that distinguish crypto markets from traditional markets. What becomes a recurring theme in the conversation is how decentralization and fragmentation present both an opportunity and a challenge. Sam provides some color into the easiest and hardest Alpha he’s earned, including exploiting a spot arbitrage with a US dollar Bitcoin and Japanese yen and triangle trade. But not all trades are that complicated. Sometimes it’s just buying Dogecoin when Elon Musk tweets about it, we spend the back half of the conversation discussing operational issues such as managing collateral, block time versus clock time, transaction costs, exchange risk and regulatory risk. For a highly systematic team. Alameda spends a good deal of time trying to qualitatively judge where the juice is worth the squeeze. I found this chat to be incredibly insightful into the world of crypto trading. And I hope you do too. Please enjoy my conversation with Sam terbuka. Sam, welcome to the show. excited to have you here. First season I’m dipping my toe into the crypto space and you were highly recommended from everyone. I was asking about who I should talk to. So I think this is going to be a really fun conversation. Let’s just start with your background. How in the world did you come to get into this space and maybe you can touch a little bit on what you’re doing living in Hong Kong right now.

Sam Trabucco  03:13

I guess I’m sure that my background, it’s decently standard in terms of like quantitative trading people. I think, as a kid, I was really good at math. I did a lot of math competitions growing up, much like math counts and stuff. I ended up going to college studying math and computer science. And my junior summer I did a trading internship at SAIC, or Susquehanna in the US. And I really liked that. I also was really into like playing strategic games my whole life. And SIG uses poker as a teaching thing, which I was very attracted to. And I ended up really liking. The internship went back full time after graduation, I was trading on their bond ETF desk, as well as their sports betting desk for a few months in like 2017 I ended up leaving for a few months, I’d been sort of noticing some things about crypto trading in this room like my personal like, obviously, like trading in my PA and saw some like really crazy looking things in crypto and spent a little time digging into it decided like, it looks like it just couldn’t be real in such a liquid market really was and sort of it had to be what I was doing full time after I realized that.

Corey Hoffstein  04:18

Can you elaborate on that a little bit? Like what were some of the things you were seeing?

Sam Trabucco  04:21

Yeah, so I like back in like 2017 this is a little less true today. I still not like totally false. But it was really true back then. Like there were these trades you could do by just like buying spot bitcoins on one US exchange, sending it to another US exchange and selling it. And there’d be like a persistent, like percent premium between these two exchanges for like fairly real amounts of money. This is like the kind of thing that like coming back from a traditional finance background. It’s just like crazy to see. And I kind of figured it was like a data problem on my end and not like a real trade that you could do. But when I did try it, it was a real trade you could do and yeah, like just devoting like a little bit of time to creating like, basic infrastructure and like grading just in my PA with the money I had was just like, too good to not do. But yeah, so that’s what I’m doing now. I did like my PA for a while, then moved to San Francisco because I wanted to anyway, which is where Alameda research was. And then Sam Beckman for you, who’s the CEO, I had gone to a math camp with during high school. So I knew him. I knew he was doing this got to talking to him at some point. And yeah, I ended up joining have been here for a few years now. We moved to Hong Kong, or like, the team sort of slowly trickled to Hong Kong. Now, almost everyone’s here, which like, ultimately has been quite nice. Just because Hong Kong did a better job early on and COVID handling in the US, like bars are open right now. It’s kind of cool. But yeah, I’ve been in Hong Kong for a year now or so. And yet, it’s trading most of my time, but

Corey Hoffstein  05:46

it’s maybe we can level set the conversation with a little bit of a discussion around what you see as being the biggest differentiating factors between crypto and traditional markets. While there

Sam Trabucco  05:59

are like some similarities. Yeah, there’s a ton of differences. Some of them are like, sort of jumped out at you, like the volatility in the crypto markets, it’s kind of insane. The stock market had, I don’t know, like, let’s that’s even looking at like March 12 of last year, like the stock market obviously had like its most volatile day in quite a while, like falling. I don’t remember the exact numbers, but like, let’s say 20%. On that same day, crypto fell, like 50 or 60%, depending on what coin you’re talking about. And Bitcoin, which is like the Hallmark product of crypto is up like 200% Since October 2020. Right now, like from dental now, that’s just like sort of not the kind of thing that’s supposed to happen in like, for like the, like the biggest products in a space. So yeah, like the volatility is obviously like one big thing that like causes the crypto markets to be different. And there’s like a few reasons that that are like somewhat more fundamental that you can point to that, like contribute to that. And also like a bit orthogonal, the lack of centralization is a big thing. So like in the traditional markets, like, let’s say that I am like a trading firm, and I like want to be trading like all the products with a given underlying like what Tesla’s and underlying for instance, mostly, all I have to do is like setup, like get my system set up, give a bunch of like money to my prime brokerage firm. And there’s a few other things I’m abstracting away, but basically, I’m done. And I can sort of like, when I try and buy Tesla, like, I’m really looking at what is the best price on all the 15 possible exchanges, and I placed my bid and I get to buy on the best one. In crypto, there’s no centralization. Like, let’s say there’s like 20 important exchanges, in order to train on all of them, you have to be set up on all of them, you have to be taking in their data, you have to be set up with their systems, you have to have collateral on all of them. And all their API’s are different, all the rules are different. And all their products even like even if they’re like identical to some extent, they are kind of just different because their order books are different. They’re trading at different prices. And yeah, like it’s a much more like complex system to be trying to think about what like what, so when I want to buy bitcoin, if I haven’t, like done a ton of work to make my systems understand, like, where is the best place to buy bitcoin? Then, like, I might have to actually look at all 20 exchanges and think about like, oh, like, Yeah, this one looks like it’s the cheapest, but also, withdrawals take four days to process from it. So like, do I actually want to buy it here? And if it’s a futures products, like one of them might look the cheapest, but maybe its index is different. And yeah, so there’s all these like idiosyncratic things that are caused by the lack of centralization in crypto, that like people in traditional finance, just like mostly don’t have to think about as long as like, as long as it’s not like something really weird. And yeah, like, I’d say, like, that’s the core of the differences is all these idiosyncrasies. There’s, like there’s a ton of different specific things I could talk about both in terms of like, the way products are weird, or the way exchanges are weird, which I think we’ll probably talk about more later. But yeah, I think this is like the core of the difference.

Corey Hoffstein  08:46

Well, talking about products, as I’ve sort of gotten into this space and poked around a little bit, one of the more esoteric products that is incredibly popular in the crypto space is this idea of a perpetual swap, this perpetual swap, actually, it turns out has far more volume than spot itself. Can you explain how this contract works? And what sort of the implications are for the crypto markets as a whole? And how they function given that actually, most of the volume happens in this contract?

Sam Trabucco  09:18

Yeah, so the perpetual swap is sort of a variance on futures, which I think bitmex were the first ones to use it in crypto, they certainly were the ones who popularized it. The Mexican exchange for reference. So basically, the way it works is it’s kind of like an auto rolling future. Like let’s talk about the Bitcoin one. So the Bitcoin perpetual swap on let’s talk about the bitmex one, just as an example, has an index of like the three biggest spot exchanges like Bitcoin versus USD spot exchanges, and it’s tracking that like snapshotting it like every second same, and it’s also tracking its own price. And every eight hours, the way that it’s actually like kept in line is, so they track the like the T whop of over the eight Our period if both the index and the futures product, if it’s been trading rich to its index, then if you are long the perpetual swap, you have to pay everyone who’s short, whatever the difference was. So if it was on average, like $10 Rich during the period, then if you’re long, at the eight hour snapshot, Mark, you pay $10. To someone who is short. Yeah, this is the mechanism by which it’s kept in line, like so if it got like, super, super rich, like everyone who’s long would have to pay. And everyone who short would get to, like would get paid, which like sort of tends to get it to trade in line with spot. And yeah, so this is like this product for a while was like the bitmex perpetual swap, and specific was the most liquid products buy like a ton. Now the next one is has a bit less volume, but the finance product, which is basically the same, again, is the most liquid Bitcoin product in the world. And, yeah, this has a few implications. So most of the spot exchanges don’t offer like a ton of leverage to traders, mostly because like, it’s sort of impractical for them to like getting letting people get like 100x, levered long, like spot has like some delivery issues, which futures do not have. And like both at max and finance, and pretty much all the major. The major futures platforms, like do offer 100x leverage to their customers. And it’s not just like a fun advertising thing that no one actually uses, like people use this. And this is actually like one of the biggest driving forces behind the volatility in crypto is this 100x leverage, because it sort of lets people put on like these giant positions that they have no real business putting on and wouldn’t be able to put on in a in a space that didn’t have this and like traditional finance lacks a mechanism like this, for instance, at least like on such a wide like a such a widespread one. And like because of the way the way it works, like let’s say I put on 100x long position on Bitcoin, like a long position. And then Bitcoin goes down a percent, which like Bitcoin does all the time, as we discussed, it’s super volatile. My position is gonna get liquidated and liquidations are rampant in crypto as a result of the high leverage and how popular the swaps are. It creates a ton of momentum where it wouldn’t otherwise exists. Like when Bitcoin goes down 5% A bunch of liquidations happen and then it goes down another 5%. And then a bunch of more liquidations happen. And then like this sort of like cascades. Yeah. So if you’ve ever seen Bitcoin, like just have these like giant periods where it’s going off uptime and downtime and uptime, etc, it’s because of this, it’s actually a fairly cool thing. And once you understand it, because it looks like Bitcoin, like sort of looks like it’s like this crazy thing and like naturally is, but like a few key reasons that it’s happening. And yeah, the swaps are one of them.

Corey Hoffstein  12:31

So I want to talk a little bit about how you think about trading the markets. And I was hoping maybe you could start by talking about maybe categorizing the different types of trades, you look to exploit, and maybe how much of your book is dedicated to each of those trades. And I’ll add in there if you can remember it even maybe what an A practical example of that trade looks like.

Sam Trabucco  12:51

Yeah, so Alameda is uh, so one of the big things that Alameda does is market making. So this is sort of our more boring activities on some level. Like I mentioned before, there’s like 20 important exchanges or something like that. Like, there’s maybe 100, important coins, like they don’t all have all of them. And there aren’t features on all of them. There’s features on a bunch of them. And Alameda is trading like basically every important product in the world on every important exchange. And one thing that we’re doing as a result is market making on all of them. So what that means is that we’re like constantly 24/7, putting out bids and offers like decently tight, depending on like how liquid the book is, or whatever, on all these products. And sometimes we have like a business reason for doing this. But there’s also like important trading reasons for it. So I mentioned that like some of the exchanges have like weird data setups, or whatever. Some of them the fastest way you can know that the price moves is by actually being the one who traded when the price moves. And so market making fairly tight on all the products, it’s actually fairly important from this perspective, because it’s often like the only way to be the first one in the world to know that like the price of XRP moves up a tick. And if you know which exchanges like on average are the leaders for these big moves, it can be like quite important to if you know that then you’re able to like combine these two pieces of information and know like oh XRP is probably going to move on all the other exchanges to or it’s probably not, and I should like be pretty excited to sell more into it. See, this is like the kind of trading that we’re doing all the time, like most of our trading is automated, as you can guess from that description of it. In terms of an example of that, it’s kind of hard to give one example like it’s most of what we’re doing in terms of a by like number of trades executed it’s most of what we’re doing. So I mentioned that we’re doing this pretty tight. The really important version of it is we’re also doing it like fairly far away from the best bid and offer. One big thing that happens a lot, especially in some of the more important products like the bitmex perks that I mentioned before, is that someone will prints like a $50 million order all at once, either intentionally or often unintentionally, because this is the mechanism that the exchange uses to liquidate a big position. It just sort of sends a market order and so like making markets really far away from the best bid and offer usually like you almost never trade like he may be trade one So weak on these quotes, but like, if I’m doing it 5% away, and I trade once a week, and I’m, like, pretty confident that if I do trade, then like, the markets gonna revert immediately because like, this person didn’t actually want to trade 5% down, they were forced to, so probably the markets not going to move 5% down as a result of this, but like, if I can, if I’m the one who gets to buy it 5% down, that’s incredible, if like, the rest of the markets aren’t gonna follow. So that’s the kind of thing that we’re doing all the time. Like I said, it trades like really infrequently, but it’s quite good when it does, and so it’s worth the capital. So yeah, that’s like one category of our trading are like 24/7 automated market making, and in terms of how much capital we’re using for it, and like, probably, like, 10% of our capital is tied up at a given time. But most of that is like orders that we’re aware of, probably are not going to trade, but like sometimes will. So it’s not like, if we desperately needed it, we could turn some of this off, something else that we do a lot is put on like basically delta neutral and therefore like basically delta neutral spreads between two products. So like an example of this would be like the Bitcoin perpetuals on finance or trading super rich to their spot index, then we might get really short these Bitcoin perpetuals on finance and buy a bunch of spot. And this is riskless. If you trust that by Nance A is like a legitimate exchange and like the money that you have there is real, and they’re not going to take it and be that their index is that they’re like correct about their index, and the funding is going to be paid out correctly, both of which are like pretty robust. At this point, it would be quite surprised for finance to not be legitimate, given how much volume is traded, given how like the extent to which their customers have been able to trust them in the past. And given the regulatory environment, it’s like pretty unlikely the violence is not legitimate. And their index is like well defined, and they’ve never deviated. So it’s basically a riskless trade, when you put these spreads on, and we’re doing this pretty big size, like across every exchange every product all the time, depending on like, during the period from November to January, when Bitcoin was climbing from 20 to 50k. The rally was led by these perpetual swaps, and they got very, very rich, like they were paying like 50 pips or something a day at various points, from longs to shorts. And when something like that is going on, we put a ton of our capital into these spreads, maybe like it depending on how you like measure it, like maybe like 20, or 25% of our working capital would be used, we’ve tied up in these spreads all the time, when that was going on. In a more normal environment. Like right now spread, like futures are still rich, but not as rich, or maybe using five or 10% of our capital on that. Yeah, that’s another category. We’re also do like, that sort of is the extent of our delta neutral trading, which is most of what we do, we don’t tend to be like, we’re not a desk that like puts all of our money into buying XRP because we like think it’s gonna go up. That’s not the kind of thing we tend to think we have an advantage in doing. Occasionally we do like, especially on shorter timescales. So I mentioned this effects before, where Bitcoin, like because of like how levered up people can get, if like, bitcoins been going up for a while, because futures are really rich, and people are buying them really aggressively. And then it goes back down a little bit, often, you’ll see it go down even more, because people who got long, like maybe 100x leverage, for instance, are going to get their long positions liquidated because they lost a bit and like, all their collateral got eaten up. And so it’s going to keep going down. And so often, what we see is that if the coin has been going up, for instance, and it like gets like X percent away from its max, especially if you’re watching like the open interest, like for these products go up as bitcoins going up and like these are public numbers, then we’ll like put on a giant short position, like expecting a ton of liquidations to happen, like our systems are such that we can like, we tend to be able to put on pretty big positions pretty fast, without having a ton of impacts. It’s because like, we’re, we’ve optimized our systems, and we are on every single market. So these tend to be quite good. And you can sort of like get them off pretty quickly. And the move that we expect to happen on average, like if it’s going to happen will happen within like six hours when we do this. So usually we’re not doing this, like usually we don’t think we have an edge in Delta bets. But for instance, that Thanksgiving move, for people who weren’t aware, like Bitcoin was like, sort of getting really close to 20k for a while before it actually got through it. And that was happening around Thanksgiving, it got close 20k then, and then it fell 5% or so. And then it fell to 16k. Like, very, very fast. And this is something that was like pretty predictable if you were watching these numbers that I described before. And it’s something that Alameda like, did do for a fairly large amount of time. Yeah, I think that’s like the gist of the kinds of trades that we do are the kind of categories of traits that we do. There’s also like random idiosyncratic things. Recently, for instance, like Elon Musk has been tweeting about Dogecoin a lot. Dogecoin is like a random mostly unimportant coin. That became important because Elon Musk decided it was his favorite thing in the world. Like we devote some capital at this point to like, if Elon Musk’s tweets again about those, we should buy it within the next 10 seconds if we can, and we just have some capital sitting around waiting to do this. And we have like a number of like idiosyncratic things like that going on all the time, but Yeah, I couldn’t really describe how much of our portfolio is doing it, it can be a lot in the rare times when it’s good to, but most of the time, it’s not.

Corey Hoffstein  20:08

In your description of all those different types of trades, I sort of mentally categorize it as there are trades that seem to be available because of the way in which crypto markets are perhaps decentralized and dislocated, and there are trades that seem to exist because of the way people are behaving. You sort of alluded to almost like that retail impulse and demand for leverage driving up, how rich the futures are perpetuals are trading. Do you think there’s ultimately more edge in understanding the way the markets function or the way people function?

Sam Trabucco  20:45

Yeah, I’d say that, like, on a typical day, when nothing sort of weird is going on, it’s really important to understand how different products work, how the exchanges work, and on some level, yeah, like how the markets work. What I mean by nothing weird is going on. I mean, like, there is not some random altcoin that’s moving 50% because of something like an Elon Musk’s tweets, or SEC action or something like that. And bitcoins not like in the middle of doubling, which again is like a pretty like globally quite strange thing to happen. On like an average day, like nothing huge happened today, for instance, like it was a fairly typical day, Bitcoin didn’t move 5%. But at this point, that’s normal. Like Alameda was not thinking about any like particular, like people driven sort of anything like we’re like trying to predict like how people work, or how people think it was all understanding, like, oh, like, we should put this spread on because this index is different than this one, or these two products have funding at different times. And so like, there’s some exploit we can do, like most days are like that most days, or it’s important to understand how the products work, understand what the status of like, Oh, these markets are more important. These markets move faster. These markets follow these markets, that tends to be what’s most important. On the most important days, I’d say, when something really weird is happening, we tend to try and use our intuition about how people are thinking a lot more. And on the weird days when there’s a ton of money to make, understanding how people work is the most important. Yes, like on Thanksgiving, it was most important to understand, like, these premia are like the biggest we’ve ever seen, on some level, they are coinciding with Bitcoin going up, that means people are like probably using this leverage that they can use. And probably if it goes down, it’s going to go down a lot. And that’s not something that we had data on, we couldn’t run a study on that to predict it. It had never happened before. We were really just using our intuition about how people think, yeah, so we’re always trying to figure out spots where we can do that. It doesn’t always work. Like I’m not saying we’re perfect or anything. So we don’t always know that there’s something that we could have been doing along these lines. But we find that there’s pretty, it’s pretty rare that we have an opportunity like that. But when there is one, it matters quite a bit. So in terms of which matters more literally, on average, I don’t know, on a median day, like understanding the markets. But on some of the biggest days, it’s understanding people.

Corey Hoffstein  22:57

You mentioned the example of Elon Musk tweeting about Dogecoin. And it’s sort of one of these interesting, fun, maybe idiosyncratic trades. I’m curious about how trades like that, and maybe some of the other trades you put on what sort of like the half life of that trading ideas. That’s something that gets picked up really quickly. And maybe the first time it works the second time you make a little profit. And the third time, it’s everyone’s quick to the game.

Sam Trabucco  23:22

Yeah, so for a super idiosyncratic thing like that. So like, that’s a particular case where like, the first time it happened, maybe Dogecoin took like a minute or so to start rallying a lot. And then, like the story then becomes, oh, Elon Musk tweeted and Dogecoin went up. Like, that makes sense. Like, we didn’t know our priori how much it was going to go up. But It like makes sense that it will go up. Then the second time it happens. People already knew about that. And they see Elon Musk tweet about Dogecoin. Again, and it happens much faster the second time, like you alluded to, and it still happened, like people are expecting it to happen. And so they buy it and like if people are buying it, it does go up. So it does happen. Yeah, it happens much faster. And the sort of whole effect where it like goes up and then it goes back down after that. Like it happens like Yeah, way faster. By the fifth or sixth time this is going on, there’s a certain amount of fatigue around it. Like each time it’s gone up. It’s like kind of gone back down, like at least somewhat afterward. And it happened faster and faster each time. Yeah. So it’s sort of just decays away. I think the most recent time he tweeted it’s still an up but like it kind of barely and then it went right back down. So yeah, and like that probably happened over the course of a week or two. This like entire cycle. Yeah, so for these idiosyncratic things, yeah, we’re like the market is able to figure it out. Yeah, it’s like kind of goes away pretty fast. And another key feature of why it can go away fast there is that like Dogecoin really is not a coin anyone cares about on a day where this isn’t happening. It does not have that much volume, maybe like 30 or $40 million or something. I don’t actually know. But something like fairly small in the grand scheme of things in crypto just isn’t a ton of liquidity where and there isn’t a ton of people who actually like care about this for something bigger like that involves like a ton more liquidity in the entire market like these spreads in like big coin futures that you can put on that’s been going on for years and like hasn’t gone away. It sort of ebbs and flows depending on how much volatility the markets got at a given time. But LME has been putting on these futures spreads for the entirety of its existence and still has them on literally right now. I don’t see that going away soon. So the half life is something like that is apparently yours at least. And yeah, I’d say that it really just depends on like, how sort of filling in the trade is, and also how much volume actually exists to put it on.

Corey Hoffstein  25:30

So in your background, in the intro, you talked about what I have to guess is probably the trade that was the easiest Alpha you’ve ever learned with us spot trade on us exchanges? I’m curious to know, what do you think the hardest Alpha you’ve ever earned us?

Sam Trabucco  25:47

Yeah. So there’s like a bunch of things that were decent in my heart isn’t that one kind of cool example, I think that is sort of analogous to the US spot exchange thing. But ultimately, it was like quite a bit harder is sort of a similar thing. Where, except with the ARB, instead of being between two US exchanges, was between Japanese spot exchanges and US spot exchanges. So for a while there was this like pretty well known trade, or like theoretical trade on some level, because like, if you just compare the price of USD and yen, you can see that like the Japanese Bitcoin markets were trading like percents away from the US Bitcoin markets. And this persisted for like, not hours, but like months. And it sort of became like a myth almost like oh, like, yes, it’s like an arm you can do, but apparently, no one can actually do it. Because if someone could be doing this, then the arm would be closing. And that was like, mostly true, except that elemina was able to do it after a certain amount of work. So the difficulty here was not identifying, oh, there’s a great trade, maybe like we can see the prices are different. It was an actually, in the operational hassle of getting all this done. The steps here, were basically, you have to have a US bank account. That sounds easy, but it’s actually not that easy. Because if this was like in 2017, when banks would sort of dislike the second they find out, you’re involved in crypto, they cut ties with you. So you have to like keep getting new bank accounts that’s going to keep doing this. So you have to have a US bank account. And you have to hook it up to one of the US exchanges. And so like say you buy bitcoin on Coinbase, like after sending dollars there, then you have to send the Bitcoins to the Japanese exchange, that’s easy, that’s just a blockchain transfer, you have to sell them on the Japanese exchange, you have to transfer that yen to a Japanese bank account, the Japanese banks have the same difficulty, as the US banks, they mostly did not have any interest in transacting in crypto, they still don’t like talking about like that part was in the past. But like getting banking for crypto companies still basically impossible in both these countries. Today, there’s a few banks that do it. And then you had to transfer the yen to the US and convert it to USD. And that part is not that hard. But like these banks, like this is sort of one thing that raises flags in the banking systems that which like might eventually lead them to figure out what’s going on. And also, like, if you want to be doing this every day, there are some like random, like timing restrictions, like it takes time to do all these transfers. And it takes a lot of time to transfer from Japan to the US. And it turned out that the only way to do the cycle once per day was to have a guy sitting in the Japanese bank, the second it opened, making them process it immediately and like prodding them at every step, because otherwise it would take like just a little too long to do to cycle in one day, you’d need to and each of these operational steps was like fairly hard to figure out it turned out and like actually being willing to do it and like being willing to aid even try not be scared off by Oh, no one’s doing this. Obviously, the thread wouldn’t exist if they were and then actually like figuring out each step not getting stuck on one of them, which like we know a lot of people did. And just following through is something that like, doesn’t sound like it should be hard, but was pretty hard. And it’s something that we like, we haven’t really had anything quite like that in a while. But being willing to like actually understand all the nitty gritty of the way that various crypto exchanges work. Various like banking systems work and like everything in between is something that we are quite good at at this point, and gives us a lot of advantages.

Corey Hoffstein  29:12

So Alameda is a primary market maker on FTX, which for listeners who don’t know, is currently the fourth largest exchange by volume, I think, and was actually started by a team at Alameda that sort of overlaps with you guys. What challenges has that presented to you? And what does it actually taught the team about trading? Yeah, market

Sam Trabucco  29:34

making on FTX has been one of our biggest challenges ever, I’d say. So like you mentioned, the like the team that started like fanback, Winfried started both, there’s a lot of overlapping, like interests here. So from day one, we were like making super liquid markets on FTX. And like in every product that I take listed, which like from day one, again, was all the big ones. And our goal from day one is have the most liquid Bitcoin market in the world. For instance, not the highest volume, obviously, because like on day one, we had zero volume, but like have liquidity there from day one as a means of getting more people to join, to want to come to FTX and trade there. And so yeah, that was sort of Alamitos mandate in starting to market make there. And it’s quite a big challenge, it’s something we didn’t really realize when we started doing it, when you’re literally just like providing more liquidity than exists on any other market in the world. It’s really like, if you’re screwing anything up, it’s trivial to like, just take a ton of money from your trading systems that are like automatically doing this all the time. And like there’s a few reasons for that. So I mentioned a few times now that some markets are more important than others in terms of understanding like, oh, like, let’s use a like just bit Mex. And finance, again, as examples, at this point of binance is a more important market in this regard than bit Mex. And what that means is that if like more permanent price moves happen first on finance than they do on bit Mex. So typically, if you see the price on by Nance like it a bit higher than bitmax, temporarily, or like in like a given instant, then we can expect on average bid Max will follow, which is like less true in the other direction. So like, let’s say that, like Alameda is like trying to provide the most liquid market in the world on FTX, and is screwing this up. And we don’t realize by Nance matters the most, then like when we’re building our models, we might be under waiting by Nance and getting picked off every time there’s a like a move happens first on by Nance, if we’re not like doing a ton of studies on this, and also, if we’re not like guaranteeing that we have the best possible data on this, then we can just really easily be hemorrhaging money every time the market moves on by Nance. And this is the kind of thing we were doing. At the start. We were like we thought about like variants of this. But we like we’re missing a few important markets. In a few cases. In a few cases, we had bad data as it turned out. And yeah, that’s the kind of thing that trying to market make for like, giant size, pretty tight, is just like really apt to teach you pretty fast, or attempt to teach you that you have some problem at least pretty fast. And yeah, so like every time we started lose, like, like, we ran a lot of studies like oh, like, here, the segments of our trading that are losing the most money. Let’s dig into these today. And we did a lot of like studies on our models, our dev team did a lot of like audits of our data input structures, and like our other things that are in our databases that I only kind of understand. And yeah, like over the first few months of this process, we were not profitable trading, for the most part. But it taught us a ton about like, which exchanges matter. How do we like robustly hat like taking what matters all the time, and like being 24/7 at this point, like Kryptos 24/7. And so we usually had someone Manning our trading systems before this, but we didn’t like optimize for it exactly. This is the first time we like really cared about always having like really, really good quotes all the time. And like having zero downtime is like not something any of us were used to. And figuring out like a way to do it was another big challenge for us. Because like let’s say we need wanted to do like an upgrade to our systems that would take half an hour before we could take our trading now for half an hour. And this was the first time we couldn’t. And yeah, figuring out like, how do we even have quotes? If our database needs to be down for half an hour? Like what are we supposed to do with that? That was a difficult challenge to solve that we eventually did. But yeah, there’s like all these unexpected things to happen. Like when you like decide you want to care about your quotes all the time. And for the first few months, we kind of thought we’re not gonna lie. But we figured it out. And it’s like, pretty chill now.

Corey Hoffstein  33:28

So I want to pivot a little bit to talking about some of the operational aspects of running a crypto fund that might be different than running a fund in traditional markets. And one of the things that comes to mind to me very quickly is that on chain transactions are just notoriously slow and even potentially rather expensive. How do you think about managing this issue of sort of block time versus clock time? When it comes to your collateral and moving money across exchanges?

Sam Trabucco  34:01

Yeah, it’s a decently big challenge. And it’s a lot more of what we think about them. Like I think a lot of people would guess. So I mentioned before, that the lack of centralization is a big defining feature of the crypto markets. And if I want to be trading on two exchanges, I need to have collateral in two different places at the same time. And yeah, they’re not directly fungible with each other by Nance and bit Max do not talk. Like I can’t put on a huge position on finance, if all my collateral is on bitmax. And tell them like oh, like Yeah, like it’s there. Trust me, like, if I really need to give it to you, it can be there in an hour. Like they don’t trust that you have to actually have it. So that makes the like actual allocation of capital A really important problem that we have spent a lot of time thinking about, like getting our automated systems to understand, but which ultimately is a big reason that I think that we’ll never be able to be confident that our systems are like actually working well. It’s like humans are like super involved in this process. So for us right now, like one toy example that you can use to think about it is, let’s say that like the finance XR He like some finance XRP products is really rich and identical products on bit Max is really cheap. A great trade then is get long the products on bit Max and get short the products on by Nance. But I need to collateralize both of these. So I’m gonna like have like a bunch of collateral sitting on both bitmex and finance. And I’m going to get long against that collateral on bit Max short on binance. If XRP, then like tanks, for some reason, like goes down like 30% in a day, and maybe I’m 5x levered, that means that my long position is going to get liquidated, this is not a riskless position at all, I have to like because of the collateral requirement and potential like for the position to get wiped away without my desire for it to be. So if this happens, I have to get collateral onto bitmex ASAP, especially if the move is fast, which it can be in crypto, sometimes these like, even for the giant products, they’ll move 30% In a few minutes. So yeah, so like at that point, I need to like get more collateral onto bit Mex, like before the moves finished happening, or else I’m going to get screwed and this position will have lost me a lot of money. So XRP, in particular, is a product that actually has fairly fast transfer times. And often on these exchanges, the way to collateralize that position in a future with underlying with a given underlying is you have to have spot of that exact underlying. And so if we’re talking about XRP, then I will be able to get collateral there fairly fast. And so I can’t afford to be like kind of risky with these things. As long as I have XRP somewhere. Like if we’re talking about Bitcoin, though, Bitcoin takes like an hour to transfer between two different places. So if I think there’s like propensity for Bitcoin to move 30% in like less than an hour, then I can’t get five that covered. Like, I can’t put these spreads on for as big as I might want to. And as big as I might be able to in XRP. And yeah, so this is like something that literally does the impact, like the kinds of bets we can make, how big we can make them. And it allows for bigger bets in something like XRP than in something like Bitcoin. Yeah. And like for what it’s worth, usually this isn’t like a this is like a big consideration for us, like, where’s our capital? Like, are we out of capital, like on exchange X? Like, does that mean we like need to get more there? Is it worth it? Is our position too big or like things like that. So like we’re thinking about this all the time, it’s sometimes matters more than others. And it turns out that on the days when crypto is the most volatile, like we can talk about March 12 2020. Again, when crypto fell 50%, or like more than 50%. When crypto is moving a lot, people are also trying to do way more transfers than usual. And on some level blockchains are really just like databases. And when there’s a lot of activity on them, they get slower, and transfers were taking forever on March 12. And this was a big contributor to like why crypto like went so wild on March 12. Not only were people’s positions getting liquidated, but they were unable to get any collateral onto the exchanges to stop it from happening, which the sort of like made it happen much, much faster than it would have otherwise. And allowed for like these liquidation cascades to happen to a much greater degree than they would have if people could just like have collateral where they want at will. And instantly, I think Bitcoin was taking six hours to transfer. And like you mentioned, these transfers can also get quite expensive when this is going on. I forget what the cost of the transfers were on that day. But it was like sky high. Recently Aetherium Aetherium is another like the second biggest crypto currency right now, last week. But I think their fees like go to their all time high to the point where FTX which typically, like transfer fees for customers, they had to stop doing that for Aetherium I forget what the exact thing that happened was like because of like various exchanges like either like stopped Aetherium transfers or had to like charge more for them or like they took way longer or something like that. On every Exchange, which Yeah, like dictates the kinds of things you can do in you know, theory and future that requires theory as collateral. And to get like actually monitoring these things. And tracking Lego like our transfer is better or worse than average, like tells you if you can put on a bigger position than average or not, like in all the underlyings. And yeah, it’s a fairly interesting problem that is quite unique to crypto.

Corey Hoffstein  38:57

One of the things that really amazes me about the crypto space is how rapidly it seems to evolve. There’s new exchanges, new contracts, new specifications, new coins that emerge regularly. How does the speed at which this all happens? The evolution of the space provide both an opportunity and a challenge to you. Yeah,

Sam Trabucco  39:20

it’s definitely both so recently, like everyone knows like Bitcoin Aetherium those are like fairly well known at this point. The big craze in the past six months has been a defy coins that defy is short for decentralized finance. All these new platforms keep popping up. Each one has its own token the platforms offer like various kinds of opportunities one big one is our like borrow lending platforms where I can like Park a bunch of my capital on their platform, and other people can borrow it and like my reward for doing this is like interest, like paid for it. Like often with the like the platforms I’m token and these tokens like keep like I mean the platforms themselves offer like often pretty good opportunities, like the actual like parking capital they’re referred to as farming. Like is often like quite good and often the best thing to do with your capital, as it turns out, but even like beyond that, like ignoring the actual platforms for a second, which like, again, is not correct to do LME that does use these platforms. But the coins themselves like have just been like, really, really volatile. And FTX has listed a bunch of them. So even if Alameda didn’t want to Alameda would be focusing on them to some extent, and figuring out like, oh, like, what drives the prices of these weird products that like, didn’t exist last week, and now have billion dollar valuations, which like, don’t really does happen, like every few days at this point. I’ll come in. And some point I hadn’t heard of the day before, literally, we’ll have a billion dollar valuation. And we’ll be market making it haven’t figured out like, oh, like, which markets are important for this, like what new data thing? Do we have to be scraping to get this right? Yeah, like actually staying on top of all this is like, very difficult. And something that we spent a lot of time on, even understanding which coins are like likely to start mattering is something we spend a lot of time on, we’ve had to like spend a lot more time on social media to understand like, what’s become popular, just to make sure we don’t miss anything. And even like social media, for languages we don’t actually speak has been something that we’ve had to figure out how to be aware of. And yeah, beyond that, like, as all these new, even just coins start existing, there’s also new contracts on them that we have to understand. Because sometimes the most important products for some new defy coin might be the finance part on it, that has an index of that, like uses that as index a price on an exchange that we’re not using. That would take us like some time to get on to you. Because like we have limited dev resources. And like, how do we price this like, it’s actually sometimes these things are like fairly difficult for us to figure out. And we likely are not doing the best things on average in these cases. But there’s just so much to be doing all the time. That yeah, like figuring out like a way to get it like kind of right, such that we’re not losing money on it is like the best we can do. And yeah, the increasing number of these like coins, and also products on these coins has presented a ton of challenges. But yeah, like you said, there’s also lots of opportunity in many of these farming projects, just to keep using that as an example has been quite good for us. Like sometimes you’ll be making per cents per day on some projects that that you figured out is that good just by like spending two hours reading, it’s like reading an entire code base or something. Because like they do tend to have public code bases. And that’s something like maybe a few people in the worlds both a know what to be looking for and B know how to do and like that’s the kind of opportunity that we get to have because we have both of those things. So yeah, like there’s a ton of new stuff all the time, which is hard, but also keeps us busy. And it’s the kind of thing where at this point pretty good at finding and exploiting. So it’s been, it’s been quite good for us.

Corey Hoffstein  42:41

One of the new things that seems to be happening at an accelerating rate, we’ve seen this in the news over the last six to nine months is an increasing adoption among institutional investors. So not only seeing crypto show up on the balance sheet of corporations, but we’re also seeing the launch of products like we just saw the launch of ETFs in Canada providing retail, easier access to crypto, and an exchange traded fund. How do you think that that’s going to change the opportunity set for you?

Sam Trabucco  43:11

Yeah, so I think that there’s a few possible effects here. One, like as more of these, like big firms, and like banks, big companies, whatever, start putting on these big crypto positions, that will just tend to increase volume across the board. And even if the volume is like restricted to certain parts of like, certain exchanges, certain like sets of liquidity, like maybe they can only use us exchanges, or maybe they can only like buy it OTC from a US OTC desk that does still drive volume everywhere, even on like the Asian exchanges, like the futures exchanges, whatever, because like people still like if the price goes up on the US spot exchanges, like the prices will like follow it on the futures exchanges that use those as indices, for instance, that’s just sort of how that has to work. And if it’s OTC desks, they like don’t tend to put on risk long term. So they have to de risk. And they’ll do that by getting, like covering that short they’ve put on on the Asian exchanges that they’re allowed to use, or like that they’re that like another of their entities is allowed to use. So yeah, like these things just tend to drive volume globally, not just in the US. Like, that’s just like pretending that the only US or the only institutional adoption will be in the US, which like, that’s been the narrative so far. But like, if it continues, probably it’ll be global as well. Yeah, so that’s one effect. And that’s like positive effects on a lot of levels. There’s also potential for more regulatory action to be taken. So for instance, in December, like we saw the SEC, released various anti XRP statements, like pursuing a lawsuit against the ripple Foundation, and like XRP itself, and a few other coins that were seen as like tied to XRP on some level, got hit quite a bit on this, and like Coinbase and like some other US exchanges, delisted XRP. So yeah, like this is like, the kind of effects you can see from being a potential result of institutional adoption is more kinds of regulation like this. At this point, it’s like pretty unlikely to affect To coins like Bitcoin, like Aetherium, and like a bunch of others that like, for instance, greyscale has created ETFs for or indicated that they plan to. And like a decent proxy is like oh, like is Coinbase currently okay with lifting coin X definitely means they’ve checked with like a bunch of lawyers who understand this landscape, like those coins are probably going to be fine. As more and more like banks and like big companies in the US start getting into this, we’ll probably like see, the cycle of regulation get set up a decent amount, we’ll also probably see more derivatives in the US get listed. So I mentioned that like this huge leverage available to traders on Asian exchanges. That’s way less true in the US right now. Most trading is spot most, and there’s only like, like, there are futures that are available, but like really not that many. And that’s the kind of thing that I think we will see more and more of as like the US actually like, okay, specific ones, because like the reason that most US exchanges don’t have them, if they’re terrified of the US, like coming in banning them and going after them. But with regulation will come like some that are approved, which will be good. And this can happen in other countries, too. Like Chinese regulation is something that I think will be pretty interesting as it evolves. And there can be like positive and negative effects on crypto from the things and we’ll have to see which dominant?

Corey Hoffstein  46:14

Are there any tactics that you guys take in terms of managing all this regulatory risk, because what strikes me about what’s so unique with the decentralized market that exists is you’re dealing with a lot of different regulatory regimes. And the decisions that might be taken by securities regulators in the US could be very different than those taken by similar regulators in China, or Germany. And that can have profound impacts on both those sort of local exchanges, as well as the ecosystem as a whole. So how do you think about navigating those regulatory risks?

Sam Trabucco  46:51

Yeah, so I think that’s the kind of thing that we’ve thought about, like at every stage of our existence, and every day, we think about LEGO like, is it okay that we have money on this exchange? Like, is it too big of a risk. So one thing that we’re always doing is like, even our automated systems have like Max capital that we’re allowed to have on a given exchange or given platform. And that’s a reflection of the idea that like, on a given day, we’re making, like 15 pips or something on average, by having our capital on this exchange. But if every day, there’s also a fit, like a, like a half a percent risk that the country where this exchange exists, like seizes all the funds that the exchange has, because they’ve banned crypto, like, suddenly, it’s bad for us to have capital there. And yeah, so like, we’re, we try and stay apprised of the regulatory landscape and all these places. And like, we have, like contacts who are pretty aware of these things like lawyers, people like that, we believe are like, basically the best people in the world, understanding the situation. And yeah, like we’ve made decisions as a result of understanding that we’ve gained from those things in terms of like, oh, we have to get capital off this exchange ASAP. And that’s a rare kind of decision that we make, but it is the kind of thing we have done. And that’s a little more general than just regulatory risk. But like the potential problems with regulation in China, or like something that we have thought about, pretty explicitly in the past, yeah, that’s like the main way in which we think about it, we don’t do a ton of thinking about like, like, we don’t like make delta bets, for instance, based on like, we think that the chances of like bad regulatory news from Country X are like high enough that we should get short Bitcoin, like we don’t really do things like that. But we do like have risk limits in place for ourselves, just like, because like, sometimes it can be like pretty tempting to put all of our capital into this, like, really, really good spread that evolve with risky exchange, but we don’t let ourselves.

Corey Hoffstein  48:39

So one of the ghosts that really seems to haunt crypto, at least from a perception perspective, was the mount Gox hack. And there is still this sort of common perception that your coins are not safe, necessarily on an exchange on a hot wallet, that they’re at risk from being hacked. Obviously, you guys have a lot of capital at risk. Talk to me a little bit about custody exchange risk, and just generally safeguarding assets.

Sam Trabucco  49:11

Yeah, so at this point, so I mentioned that there are 20 important exchanges. And there’s a few ways in which those 20 have have like sort of defined themselves as more important than the others. One of them is sort of just having volume, because if you don’t have volume, then you can’t matter. But another thing, and one that leads directly to them having volume is that they have sort of had, like, at this point, pretty robust histories of not having anything like that happen, or at least if they did have something like that happening, like 2015. They’ve revamped their systems in a pretty public way, Devon, and demonstrated that they have like much better safety in place. So like, we’re never 100% sure that any given platform is safe. In this regard. That would be literal 100%. That’s impossible. So we do like we are assigning some risk of this kind of exposure being bad to any given platform where we have capital, and that’s what dictates the max capital were allowed to put there by our own rules. But for the most part, like the 20 exchanges that were like willing to place anything, have like publicly documented the kinds of safety measures they put in place, in order to safeguard their funds. They’re keeping some amount of their money in cold wallets, versus hot wallets, which are actually I’m not sure how well defined that system is. But like, in general, they’re like keeping their money in wallets that they’re not touching day to day that are actually fairly difficult to access for various reasons, either, because you need like multiple people, or like multiple kinds of keys that are kept in different places that are hard to access all at once, in order to access them or like some systems like that. And in general, they’ve like, undergone like security audits that like make it at least like quite unlikely that they’re actually at risk of any, like a hack or like any important security exposure. And yeah, this is the kind of thing where, like, if a new change pops up, and they’ve said nothing about their security, they’ve not demonstrated anything, and they’ve also like not had any history, that demonstrates, it’s pretty unlikely that they can be hacked, we’re not going to trust them, we’re not going to give them anything. But if they’ve gone five years after posting their policy about like, this is how we keep our money safe, and they’ve had no problems, then like we’re just gonna trust them. We’re making enough money on an average day that it’s like a positive expected value trade to keep money there. And yeah, on some level, that’s the real safeguard that we use. Let’s say that we like are actually making 10 pips a day trading on an exchange 1000 days later, we’ll have made up all our capital, if the risk is on a given day of losing the money is less than one of the 1000 Then we should just do it, even if we like know that there’s actually some risk. But yeah, so like, we think about these things all the time. Our systems think about them, too. And yeah, we are pretty safe about it.

Corey Hoffstein  51:41

Well, Sam, I know this has been an enlightening conversation for me, and I suspect for many of my listeners who haven’t necessarily taken a dive into this space, so I can’t thank you enough for your time. I really appreciate you spending it with us.

Sam Trabucco  51:54

Yeah, it was a fun conversation for me too.

Corey Hoffstein  52:01

If you’re enjoying the season, please consider heading over to your favorite podcast platform and leaving us a rating or review and sharing us with friends or on social media. It helps new people find us and helps us grow. Finally, if you’d like to learn more about newfound research, our investment mandates mutual funds or associated ETFs please visit think And now welcome back to my ongoing conversation with Harley Bassman options, there are a lot of degrees of freedom to keep in mind when you’re entering a trade. There’s the instrument you’re looking to trade, the tenor the strike, you could even talk about the structure of the trade. For investors who are pursuing long convexity positions, are there certain best practices that they should keep in mind or perhaps definitive potholes that they should avoid? There

Harley Bassman  52:53

are a few tricks which can be bothersome for short, dated options could be a large dividend coming up, there could be some of the various outcomes is difficult. There could be hidden call features and securities that are problematic. But options in general, what I would say is, this goes for anything that I’m investing in, is that sizing is more important than entry level. Clearly, if you pay a high price or sell a low price, that’s bad, but let’s ignore that. And let’s just talk about that we’re dealing in relatively liquid fair markets where things are fairly priced. If you want to go in there and allocate assets, allocate money for risk, you have to ask yourself, What am I trying to accomplish? And what is my time horizon? And how can I be structured, I can hold this trade, for the fullness of time until I get to where I want to be sizing it large enough will make a difference. Small if I won’t get blown out. I think what happens with people in a lot of these convex trades is that they really haven’t thought through ex ante. What is my risk profile, how much we’re willing to make, before I sell how much I want to lose. And when they get these trades on too big, they tend to make a mistake, they get stopped out. If you look back to the COVID march Wipeout last year, what really happened there, if you had just gone to sleep, gone to Mars in January and come back now, you probably won. What really happened was we went down and people got stopped out or they got scared or they got whatever, once again, not to pitch our product too much. But this is why you want to own simplify products. Because by owning the embedded optionality in these products, it allows you to go and not get scared or stopped out of a good idea. By short term local volatility now is COVID A short term local volatility. That’s kind of pressing the definition. But yeah, it kind of is. is. And so to the extent that you have protection on both sides, you’re all right to the extent that you have a plan that you can live with your All right. And so I think what happens is people might do an option or a convexity trade with a certain horizon, but they haven’t really thought through the path dependency to get to that horizon. And they make a mistake along the way. So I think going to the bar, having a beer and kind of thinking a little more closely to what you’re doing is probably a better idea than just picking up your app and trading a Robin Hood option.