What Are SBF and Others Actually Arguing About? SBF Explains Algorithmic Liquidation Mechanism in Lengthy Post and Fires Back
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What Are SBF and Others Actually Arguing About? SBF Explains Algorithmic Liquidation Mechanism in Lengthy Post and Fires Back
SBF responded to questions raised by traditional futures brokers and commission agents.
Navigating Web3 tides with focused insightsThe CFTC (Commodity Futures Trading Commission) held a public roundtable in Washington, D.C. on May 25, bringing together representatives from the derivatives industry to discuss FTX's proposal for "intermediary-free trading." Unsurprisingly, SBF, founder of FTX, faced strong skepticism from traditional futures brokers and commission merchants. What exactly are the concerns raised by traditional finance? And how does SBF respond?
In March this year, FTX submitted a proposal to the CFTC seeking to replace traditional FCMs (Futures Commission Merchants) with algorithmic systems1. The model requires customers to deposit collateral and continuously recalculates margin positions. If margin levels fall too low, FTX would initiate liquidation within seconds.
Both sides clashed intensely during the roundtable discussion.
Opponents such as CME (Chicago Mercantile Exchange) and FIA (Futures Industry Association) argue that algorithms cannot handle "unforeseen circumstances," and that human intervention is still necessary at times. Proponents counter that 24/7 real-time liquidation offers superior risk management capabilities.
SBF explained that under this model, clients would deposit collateral/margin directly with the DCO before establishing positions—contrasting with the current system where DCOs oversee clearing members (FCMs), who are responsible for margin calls.
"The way I envision it, customers deposit margin with the DCO upfront before taking a position. This margin serves as collateral, not relying on the creditworthiness of FCMs. In this model, the DCO can run efficient risk management models, meaning anyone can trade."
Unsurprisingly, opponents disagree.
Sean Downey, Executive Director at CME, argued that replacing human oversight with algorithms relies on many assumptions and over-relies on margin mechanisms, but margin and capital are fundamentally different. Insufficient capital in the system could trigger cascading liquidations and flash crashes when prices move beyond 'price bands.'
[Note 1]: FCMs can accept futures trading orders, collect margins from clients, and provide trading and settlement services for other intermediaries.
Where exactly lies the core issue?
Currently, traditional futures clearing operates through FCMs collecting and calling for additional margin. During exceptional periods or for key clients, they may even offer pre-funded liquidity services to prevent forced liquidation.
While opponents reject algorithmic liquidation, ironically, both sides agree that automated clearing works well for cryptocurrencies. The real concern is whether applying automatic liquidation to other commodity markets could destabilize them.
According to an explanation from FTX.US policy, if FTX’s proposal is approved, DCOs (Derivatives Clearing Organizations) under CFTC jurisdiction could offer these services directly to users. That means this clearing model could eventually be extended to other commodities—which is what opponents truly fear.
Beyond the significant interests threatened by eliminating FCMs, physically settled futures are also not fully compatible with automatic liquidation. As previously mentioned, once price volatility exceeds predefined bands, liquidations may be triggered, potentially causing sharp price collapses or spikes.
Nelson Neale from the National Farmers Cooperative Council stated that while automated liquidation suits cryptocurrency well, it is not an ideal solution for those depending on stable energy or food prices.
"Under automatic liquidation, severe price swings would obviously be bad for crypto traders (i.e., facing liquidation). But for American farmers, the consequences would be far worse than anything seen in crypto markets."
SBF has something to say
Although the roundtable lasted a considerable time, SBF used Twitter after the event to further clarify his points due to incomplete responses during the session.
Responding to criticism about insufficient system capital, SBF countered that FTX has already injected capital:
"We have capital deposited in this system—we recently added $250 million—so capital adequacy is not an issue."
SBF also emphasized that FTX has implemented Price Bands for stability:
"Price bands prevent flash crashes. We do have price bands—I don’t know why some people think we don’t."
Next, SBF devoted significant effort to explaining how FTX’s algorithmic clearing differs from traditional models.
He noted that the practice of requiring upfront margin deposits actually better protects customers and avoids systemic risk—the best example being FTX’s existing tens of billions in assets held as collateral (margin).
He also agreed with ICE’s view that the system should allow third parties to extend credit to clients at risk of liquidation.
However, SBF stressed that emergency credit in this system comes from third-party assets—not funds from other users—and because of "real-time clearing," there is a strict time limit for margin top-ups.
"Frankly, when a DCO risk manager talks to a large client on the phone and decides, based on trust, not to issue a margin call, they’re effectively gambling with other clients’ assets—that’s terrifying!"
In addition to margin, SBF reiterated that FTX maintains a guarantee fund:
"Let me remind everyone again: FTX doesn’t rely on credit, so we don’t need extra capital to support lending—but we still have initial margin and a guarantee fund.
Strangely, these critiques seem to overlook the clear fact stated in our proposal: we have a guarantee fund in addition to margin."
SBF emphasized that FTX’s automated clearing mechanism isn't opposed to traditional FCMs.
He acknowledged that automatic clearing might not suit every product, especially those involving physical delivery. But the key, he said, is returning to market choice—letting customers decide which exchange and clearing mechanism to use.
SBF’s lengthy Twitter thread aimed to clarify misconceptions and explain how these mechanisms work and why they were designed this way—though he did take jabs at uninformed commentary.
In response to CME executive Sean Downey’s claim that “the traditional clearing system works well and hasn’t had problems,” SBF replied with “LOL nickel”—“LOL” meaning laugh out loud, and “nickel” sarcastically referencing LME’s recent suspension of nickel trading due to a price crash.
He also expressed dissatisfaction with the assumption that a roundtable discussion before self-certification is necessary.
Self-certification means that if an entity is a DCO regulated by the CFTC, it only needs to submit written documentation proving regulatory compliance and prior approval requirements before launching a new product.
If no violations are found by the CFTC, the DCO can launch the new product after one business day.
CME previously launched Bitcoin futures using this method.
SBF mocked:
"Glad to hear competitors now believe that a fully communicative roundtable must precede self-certification—so I guess they’ll support holding roundtable discussions every time they self-certify a new product?"
He also criticized those commenting arrogantly without fully understanding the automated clearing mechanism:
"They all talk about needing price stabilization mechanisms—to protect users during extreme minute-by-minute volatility.
Yet some understand crypto markets less than FTX users themselves—ironically, today we’re supposed to listen to them lecture us about protecting users."
Different clearing logics, still seeking consensus
Overall, the two sides follow fundamentally different approaches to clearing.
For traditional finance, since derivatives typically experience lower volatility than crypto and clients seek capital efficiency, they prefer having FCMs assess customer credit. So long as credit is sound and FCMs can cover margin shortfalls, this clearing model functions.
But given crypto’s high volatility, FTX’s clearing system requires collateralized margin and real-time liquidation. The benefit is eliminating third-party intermediaries, thus avoiding scenarios where FCMs gamble with other clients’ funds.
Using a hotel analogy: the traditional finance mindset is like verifying a guest’s identity and having recourse—if the guest lacks funds, the hotel covers the cost and earns interest.
SBF’s approach, however, is like fearing guests might damage room equipment, so requiring a security deposit upfront, refunding it upon checkout only after confirming no damage occurred.
Thus, SBF believes the key is returning to market mechanisms—letting customers choose their preferred exchange and clearing method. Yet innovation inevitably draws opposition.
As SBF concluded in his tweet thread, FTX must be doing something right.
"I think if what we're doing is making everyone here debate, argue, and learn, then we must be doing something right.
Without Zach, Brian, Julie, and the entire team pushing hard, we couldn't have come this far."
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