I have a love/hate relationship with Chuck Mackie. I love him because he is a great guy, good citizen and cheerful practitioner of solving the world’s problems with market based solutions. I hate him because he really knows how to make me work, and work hard. Don’t worry, there are others on this list too (Hello, Barbara).
On Thursday Chuck emailed me and asked when I was going to write a comment letter for the FTX request to the CFTC for LedgerX LLC, doing business as FTX US Derivatives, “to amend its order of registration as a DCO to allow it to modify its existing non-intermediated model.”
Here is where the hate part comes in. My plate was already full. I am busy working on uploading videos from FIA Boca 2022, writing recaps for the videos, handling marketing calls and even non-profit work, just to name a few. That does not even include the three proposals I am behind in delivering, or the new media kit I am working with Patrick Lothian to develop. And Chuck wants me to comment on this request, which of course I can’t get out of my head. So my Friday night, except for watching my alma mater’s basketball team fall to a historically improbable foe, was writing a comment letter and sending it to the CFTC. I also shared it on social media.
Here is my letter to the CFTC:
March 25, 2022
Mr. Christopher Kirkpatrick, Secretary, Commodity Futures Trading Commission
Three Lafayette Center
1155 21 Street NW
Washington, DC 20581
Re: John Lothian Comment Letter on FTX Request for Amended DCO Registration Order
I appreciate the opportunity to share my views on this subject with the Commission. It is often said that the views you express depend on where you are sitting. I have sat in the chair of a broker, a Commodity Trading Advisor, a risk manager at a Futures Commission Merchant and as a journalist covering market structure for the last 22 years.
Throughout my career, I have been a supporter of innovation in the markets and watched firsthand as innovations succeeded or failed but always led to the next innovation. I was an early innovator in getting onto the internet and then in electronic trading in the listed derivatives space. I could see how electronic trading was going to change the world. This proposal from FTX is just the latest attempt to do that.
I am not a broker anymore. I don’t sit in that seat, but I know the perspective. I am a Commodity Trading Advisor, though I am no longer actively managing customer funds, but I know the perspective. I am no longer a risk manager at a FCM, but I know the perspective.
I am a journalist. I am also an individual investor, who has never invested in crypto and is not likely to anytime soon. The fear of missing out has never been a strong emotion for me and there are journalistic conflicts of interest I wish to avoid.
The perspective I have always tried to take, whether a broker, risk manager, CTA or journalist, is that of the retail investor, or the individual citizen. I have sought to protect their interests no matter where I sat or what role I played.
So, how does this proposal impact the individual investor? While the focus is on efficiencies in a non-intermediated model, the model FTX proposes, to use a crypto term, is a fork from the retail FX market model. In the retail FX market, when leveraged investors run out of money, they are automatically taken out of the market. FTX offers a similar type of liquidation process initially.
To those that say the Commission would be holding back innovation by not approving this request, I would offer that if this model were so superior it would have spread beyond the retail FX markets long before now.
What this form of liquidation does is remove any mitigating circumstances that may be involved in a margin call process. I have seen stale quotes create issues, or limit moves in commodities with one month unlimited and the other stuck far away at the limit, all while the quoted spread did not move. Not all margin call situations are so cut and dried that the customer can be fairly treated every time with a simple automatically executed algorithm.
Now, I realize there are firms today that use similar liquidation strategies for clients. That is OK, because the customers had a choice at the broker level as to where they wanted to trade and what the broker’s margin policies were. The one-size-fits-all model at the exchange offers no such choice. And I am a walking example of one size does not fit all.
I have some concern that this auto liquidation algorithm is ripe for manipulation by sophisticated traders. Anytime the market knows something, the results for the trader on the other side is never pretty. Professional traders like to read the fine print, and the liquidation rules are just that.
While I have concerns about this proposal, I am not recommending the Commission deny it. Rather, I ask the Commission to dig deeper than they already have before making a decision. I believe it is that monumental of a decision. While I am biased towards letting the market decide, I am more biased towards protecting market integrity and market participants. Perhaps taking a page out of the SEC’s playbook and enacting a pilot program before granting final approval may be a step forward.
Change has taken a lot longer to accomplish in the U.S. derivatives industry than many recent pioneers have expected. A prediction from a respected trader that the U.S. Treasury Bond pit at the Chicago Board of Trade would be closed by the year 2000 proved badly timed. That prediction was only 15 years off.
To sum up my advice, take a step forward, not a leap, and don’t lose your footing in case you need to take a step back.