Last month an independent crypto researcher who goes by the name, Hasu, posted an article exploring some of the most prevalent concerns users have with crypto exchange behemoth BitMEX, one of which is that the exchange trades against its customers to make a profit. BitMEX CEO Arthur Hayes publicly came out against the allegations on Monday in an interview with Yahoo Finance.

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Hasu brought up three shady practices in his article that he claims the people he spoke with – on condition of anonymity, had concerns about. While there is no hard evidence to support them, he still views them as valid in consideration of the incentive BitMEX has through them to make money.

  1. BitMEX trades against its customers.
  2. The exchange “weaponizes” server problems.
  3. BitMEX monetizes customer liquidations via its insurance fund.

The Desk

BitMEX has its own trading desk that acts, according to BitMEX’s website , as a market-maker posting bid and sell orders to bring liquidity to the market. They fill an exchange order book, and others match those orders. Any money made by a market-maker is gained through the spread of pricing, not through trades.

This is exactly what Hayes claims BitMEX’s trading desk does, stating in the interview with Yahoo that no one is granted exclusive or special access to the desk’s information:

“They have the same trading rights as any other regular trader, they can’t see the liquidation prices of any of our customers. We don’t trade against our customers. It’s actually pretty bad business model and introduces a lot of risk into what is right now a riskless business model, BitMEX. We match trades, that’s it, we have no risk. Trading against our clients is nonsensical.”

Hayes also states on BitMEX’s official blog that “no front office personnel are shared between the trading business and [BitMEX],” and

“that the trading business operates from a separate physical location, and…does not have access to any platform order flow, execution, customer or other information on terms that are not otherwise available to any other platform user.”

In his post, Hasu alleges that the exchange kept its trading desk a secret, and even insinuates that that may have lost their legal counsel after making it known to the public. He asserts most of BitMEX’s customers “don’t believe” that their trading desk breaks even, and cites a lack of an external audit of their business practices as the source of customer concern.

“Weaponized” Tech Issues

To Hasu’s second point, when the exchange receives more orders than it can process at once, which is frequently, BitMEX will temporarily shut users out and close down to trading. It is during this period that the people who spoke with Hasu think others are given priority access to the network while everyone else is forced to sit and twiddle their thumbs.

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In his article, he alleges server overloads happen as many as two to three times daily, and that while the desk contends it closes open orders first, it’s impossible to do so with certainty when users are logged out of their accounts and can’t get back in to close their orders. Furthermore, the article cites the “market keeps moving” during these outages and takes that activity to mean that someone is still able to trade.

Theoretically, this could allow someone to buy an asset on BitMEX while the price is frozen cheap, then sell it at a gain elsewhere.

Hayes also denies this, reiterating that his company doesn’t give priority access to anyone, though he stated during the interview that they’ve been asked before:

“Many clients, larger traders, ask us for a special API, or can we colocate somewhere, or can we get a special order type so we can bypass the queue and we’ll pay for it or when there’s a time of system overload can we get priority access? The answer to that is always no.”

Hayes also attests BitMEX’s top priority is fixing the exchange’s server issues, and that they’ve increased the volume of orders they can process already.

The Fund

The third point raised in hash’s article was BItMEX’s insurance fund. He upholds that the fund is far, far larger than necessary to cover BitMEX’s losses, even in a worst-case scenario. The fund stands around 14,000BTC, with 11,000 of them allegedly added this year. The fund gains money when a leveraged trade is closed out and BitMEX liquidates the order. If there is a surplus of money after a liquidation, it goes into the fund.

The insurance fund is meant to provide resources in times when the market is especially volatile, as a backup if the price of BTC moves drastically before an order can be closed. Hasu contends the fund is actually making BitMEX money, saying that BitMEX views it as an asset since they don’t store the BTC in a separate account or cap its growth. He argues that it creates an incentive to grow the fund as large as possible, then liquidate it. 

According to Hayes, however, the fund is “a function of the market,” and the large amount stored there could be needed. When the SEC denied an application to offer Bitcoin ETF last year, Hayes says the fund was basically emptied, stating:

“The price dropped about 30% in about five minutes and we actually emptied our entire insurance fund and we still had to close out traders who were short, had the correct position, but they didn’t get the full benefit.”

He added,

“A lot of people have forgotten about that but it was actually very traumatic for a lot of clients who put on a position, expected a certain amount of profit, we weren’t able to live with that.”

After Yahoo’s interview was published, Hasu responded on Twitter that while Hayes addressed the concerns listed, he did not speak to the list of suggestions offered at the end of Hasu’s piece.

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