Prominent market maker Wintermute said Declutter that trading halted during last week’s flash crash, resulting in over $19 billion in crypto liquidations as prices of Bitcoin and other assets plummeted due to President Trump’s latest tariff threat against China.
However, the company said it wasn’t so it could make more money, as some have Social media users speculated– but rather because internal rules were broken during the market collapse.
Wintermute Agency strategist Jasper De Maere explains Declutter that the market maker takes a “highly rules-based approach,” which includes being delta neutral – a hedging strategy that requires taking multiple positions so as not to maintain directional exposure to price movements.
Market makers continually buy and sell cryptocurrencies to stabilize prices, ensure liquidity, and improve market efficiency regardless of the market’s direction. Often this requires creating a predefined ruleset and implementing automated trading systems.
During Friday’s crash, Wintermute’s rules were broken and the company was forced to regroup.
“For example, if we short a perpetrator for whatever reason, and we get liquidated at these very volatile peaks, then it becomes difficult. Then you have to rethink your entire market making strategy,” De Maere explains. “The violence and the speed with which this whole liquidation cascade occurred made it very difficult to continue to create markets in that particular window.”
De Maere confirmed that Wintermute stopped trading for a “very short time” as it tried to understand what was going on. He declined to confirm the exact time frame for which trading was halted, or explain the details of which rule was broken.
The Wintermute agency strategist also said it is a “safe assumption” that other market makers were affected on Friday. Market maker LO:TECH, for example, also confirmed this Declutter that trading was temporarily halted on Friday.
“Our systems worked as intended: the risk engine circuit breakers tripped and took our quotes out of the market,” Marcus Horsley, CTO at LO: TECHtold Declutter. “The exchange APIs were quite unreliable at the time, so it took us a little longer to get back to full size while we worked through these issues.”
Rumors soon began to spread on social media that the crash was the result of a “coordinated withdrawalby market makers in an attempt to maximize profits. LO:TECH denies these claims and states that its systems are fully automated.
Either way, there is a real impact on the markets when market makers are forced to stop trading.
Messari Research analyst Matthew Nay told it Declutter that market makers ceasing operations would result in “massively less liquidity in order books,” making prices more volatile.
Greg Magadini, director of derivatives at Amber datesadded that this resulted in a fragmentation of prices from exchange to exchange, but defended the withdrawal of market makers.
“If you think of a big market maker, [it] could keep Binance, Bybit, OKX and Deribit all in line by putting liquidity in all the different locations and making sure there are bids and offers moving the same way in all locations. The problem is that the [market maker] cannot rely on its hedges because of this automatic deleveraging,” Magadini said Declutter.
He continued to explain that in traditional markets the clearinghouse can cover traders’ potential losses, and some crypto exchanges have insurance funds for this reason. However, he said a lot of exchanges last week are fun Hyperfluid have chosen to use automatic deleveraging, where winning positions are closed once the other side of the trade has lost all its money.
“Those gains may well offset the losses on one of the other different exchanges, and so it becomes a lot riskier and more unpredictable to be in the middle and provide liquidity to this fragmented environment.” said Magadini. “If you’re a market maker and you can’t trust the integrity of your hedges, the only thing you can do is pull out.”
Ultimately, Wintermute’s De Maere said if the company can “create markets in a safe, delta-neutral way,” it will — but that wasn’t possible last Friday due to the severity of the flash crash.
