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At one point, in the early days of crypto exchange FTX, its automated “risk engine” suffered an error that turned a routine liquidation of a few thousand dollars into an almost catastrophic series of trades.
Within the company, they called it the “auto-deleveraging event,” FTX founder Sam Bankman-Fried said Friday in testimony in his criminal fraud trial.
As FTX grew, the volume of trades strained the company’s computer systems, and the “risk engine was effectively sagging under the weight of that growth.” The engine was an automated program that would liquidate positions that were at risk of going negative.
Because of a delay of a few minutes, the risk engine closed a “relatively small position” over and over. To correct its error, it had to buy back the erroneous sales. The engine wound up in a feedback loop that wound up moving “trillions” of dollars.
“That caused downstream issues, unsurprisingly. It was ridiculous.” The trading became so large, it had to go to a backstop liquidity provider, in this case Alameda, because it was the largest account on FTX. That caused Alameda’s account to go under water, triggering a potential liquidation of Alameda’s account.
“The whole thing shouldn’t have happened,” Bankman-Fried testified Friday.
FTX leaders had to shut the exchange down for an hour to fix the problem.
“It was scary,” SBF said, because it exposed a larger concern “that if there were an erroneous liquidation of Alameda, it would have disastrous consequences.”
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