DL Research Content

A conversation with Laurent Benayoun, CEO, Acheron Trading

A conversation with Laurent Benayoun, CEO, Acheron Trading
Credit: Darren Joseph

In a 2022 blog post, Acheron said that it expects long term market health to improve through consolidation and purging of weaker market makers. How has the crypto market making landscape evolved since the collapse of FTX?

In every bull market, greed leads to careless risk taking. When markets stop performing, losses on risky bets accumulate, exposing conflicts of interest, excessive leverage, market manipulation, and other harmful practices. Ultimately, entities taking excessive risk in the bull market get into trouble when they have poor risk management practices. Their failure further exacerbates the bear market effects. Acheron has always placed emphasis on risk management and remaining a going concern through all periods of the business cycle.

Traditional markets experienced a surge in retail trading during the meme stock bubble event of January 2021. In the wake of the event, conflicts of interest were highlighted among prominent market makers and a series of market reforms were proposed by the SEC to improve market maker transparency. As the crypto market experiences its own “memestock” event cycles, with various dog and frog-inspired tokens skyrocketing to billion-dollar market caps, how does the role of crypto market makers and the exchanges listing these coins compare?

Memestocks and memecoins do not have much to do with one another, at least from what I can see. Indeed, there are significant structural differences between tradfi and crypto markets. In traditional markets, memestocks are still stocks from real businesses. Trading could be interrupted at the broker’s discretion due to funding/clearing house constraints. Institutions could be shorting massively, which could lead to a short squeeze. Ultra High-Frequency Trading leads to payment for order flow being ultra important for market makers (MMs). None of this really applies to memecoins. In crypto, MMs bring a special asset to market, implying a different premarket modelling. Shorting is limited, and institutions are not shorting massively given risk management practices and knowing what volatility is like in crypto anyways. True collocation is rare: we’re talking virtual private networks at most. Exchanges witness sporadic yet significant volume and price action on these markets. Exchanges also act as a broker, matching engine, and clearing house, all at once.

How does Acheron navigate the ethical considerations and potential conflicts of interest in market-making practices, such as shorting client tokens?

Externally, we provide a portal for all clients, even for what would be considered “arms-length relationships”, such as those in the loan and call option model. The portal provides real-time metrics - instead of backward-looking reports - such as liquidity, number of orders, market share, fill volume, and more. Internally, we have established a very strict trading policy for all team members and their families. This trading policy includes blackout periods, approval and supervision of trades by compliance, and prohibits all forms of market malpractices, such as insider trading.

You’ve stated that Acheron is willing to forego profits in its mission for combating the negative perception of market makers, by acting in good faith and providing transparency. What strategies does Acheron advocate for to ensure sustainability and integrity of market-making activities?

Parasitic MMs take a probabilistic approach: 95% of markets trade below listing price 180 days after primary listing. Their playbook is simple: short sell as much as possible from the loan granted by the issuer, forcing selling pressure to exceed buying pressure, killing momentum and price discovery. This creates a self-fulfilling prophecy of downward price movements, allowing parasitic MMs to repurchase tokens sold initially for an immaterial amount and pocketing the difference. This playbook is profoundly nefarious to all market participants: issuers (witness poor price performance), investors (have to wait for vesting unlocks to sell an asset going down in value), and the community of initial buyers (often suffering the largest losses). Acheron’s symbiotic approach involves a fully automated delta-hedging long gamma strategy. In other words, Acheron locks the value of call options initially and profits from volatility.

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Automated Market Makers like Curve and Uniswap have been a cornerstone of DeFi and have played a large role in the growth of the industry. How should PMMs and DMMs adapt their strategies to remain competitive in an increasingly decentralised landscape?

AMMs are commonly mistaken for competitors to MMs, when in fact they provide additional hedging venues and generally contribute to making markets more efficient in their own way. MMs simply develop new strategies, representing interesting research and technical challenges. As trading flows continue to shift to the advantage of DEXs, as it already has, DEXs will attract regulatory scrutiny, especially when it comes to Know Your Customer (KYC) and Anti-Money Laundering (AML) regulation. Enforcement action on decentralized services is already underway. How would the introduction of hybrid exchanges (DEXs that incorporate features of CEX platform e.g. limit order books) change market makers’ participation in crypto markets? MMs must continually adapt, as they always have. For instance, Acheron Trading has integrated some of these hybrid exchanges (for example one featuring a CLOB, a fast matching engine, and on-chain settlement layer). Acheron Trading has also been a major liquidity provider for such venues. Again, this presents an interesting research/technical challenge, and is consistent with the earlier observation regarding the absence of strict dominance of DEXs over CEXs.

What role do you foresee AI playing in market making, for example detecting and preventing market manipulation tactics?

While Machine Learning (ML) can certainly assist in pattern recognition, financial markets, in general, are notorious for their significant noise, and crypto markets specifically may lack sufficient data to prevent or mitigate overfitting. I am uncertain about the extent to which AI is used in tracing funds, but it may streamline the efforts of government agencies and their service providers in efficiently tracing illicit activity on-chain. Only the future will tell what the viable applications of these technologies will be.

With the ongoing advancements in quantum computing and increasing possibility of large quantum mining operations, how real is the risk of a 51% attack on the Bitcoin network?

If quantum advantage is achieved in unstructured searches, then the 51% threat could become very real if the network fails to adapt. That said, it may not make sense to attempt to do so from a game theoretic perspective, as the entire network would lose its value instantly. Also, it is challenging to gauge how close we realistically are to achieving quantum advantage, as some problems in the field are undermined, despite advances. After all, BTC is a technology solution that needs to evolve with time to retain its value, unlike gold or other forms of money.

Read the full report, The State of Digital Assets in Europe