Bitcoin flash crash behind Alameda: a "fat finger" trade resulted in losses of millions of dollars.

2023-09-21 14:17

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The story of Alameda Research causing a short-term flash crash in the market due to a "fat finger" trade has caused a global sensation, but at the time, the public did not know the truth behind the scenes.

Original author: Adi, former employee of Alameda Research

Translation: Luffy, Foresight News

Alameda Research once caused a short-term market flash crash due to a "fat finger" trade, which caused a sensation around the world, but at the time the public did not know the truth behind the scenes.

(Translator's note: In the rapidly changing electronic financial market, traders must act quickly to make transactions. The high-intensity work and immense pressure may cause traders to accidentally press the wrong keys on the keyboard.)

This happened a few weeks after I joined Alameda as a practitioner in the encryption industry. I had just grasped the company's engineering workflow and started to understand the trading system. At a high level, Alameda's trading operates in two modes:

One of the main ones is our semi-systematic strategy, where traders set model parameters to control a complex automated trading system. This way, traders do not engage in actual trading, but instead fine-tune algorithms to determine how to execute these trades at high frequencies.

However, every once in a while, traders need to execute trades manually. Typically, if our automated trading system fails due to market volatility, or if there are arbitrage opportunities in places where we haven't set up automated trading, manual operation may be necessary.

Our automated trading system processed the vast majority of Alameda's trades. Therefore, we conducted a soundness check to ensure that the orders sent were reasonable relative to the current market price. However, this is not the case for manual trading, as manual trading is essentially discretionary.

The tricky thing about risks is that they are often invisible until they suddenly appear and bite you in the butt.

Okay, on October 21, 2021, a trader from Alameda made a mistake.

The trader attempted to sell a batch of BTC based on a message and placed an order through our manual trading system. They misplaced the decimal point and sold the Bitcoin at a cheaper price instead of the current market price.

The results were immediate. In some trading venues, the price of Bitcoin plummeted from a high of $65,000 to a low of $8,000, but was quickly restored by arbitrageurs.

Sudden price movements have ignited discussions on crypto Twitter, with traders scrambling to figure out what exactly is happening:

News media has also started paying attention to this matter. Binance US is one of the main venues for this lightning crash, and it has issued a statement claiming that it was caused by one of their "institutional traders" whose "trading algorithm had flaws".

I guess Caroline has called them.

Alameda's loss in "fat finger" trading was staggering tens of millions of dollars. However, as this was an unintentional mistake, nothing was done except for implementing additional integrity checks for manual trading.

Alameda's typical approach is to wait for a problem to arise and then quickly fix it. That's why we've spent so much time implementing soundness checks, something that no "traditional" trading company would ever start trading without.

Afterwards, everything returned to normal. According to SBF, the benefits we gained from quick action outweighed the occasional costs we paid due to risk checks, security breaches, and other reasons. This is SBF's work philosophy, which drives the corporate culture he created at Alameda and FTX.

In the past two years, the Bitcoin flash crash has been a mystery in the public's mind. Now you know who should be responsible for this and what happened behind the scenes.