Why did market makers like Wintermute stop trading during the Bitcoin crash, resulting in a $19 billion liquidation?
During last week’s flash crash, some market makers halted trading, potentially exacerbating market volatility. Here’s what happened.
Last week, amid a $19 billion rout, market makers Wintermute and LO:TECH briefly suspended trading.
The two companies said the reason for the suspension of trading was that their preset trading rules were broken and they had to temporarily "reorganize their front."
“If we could provide liquidity safely and in a delta-neutral (no directional risk) way, we would have done so — but we couldn’t at the time,” Wintermute told Decrypt.
Prominent market maker Wintermute told Decrypt that it halted trading during last week's flash crash, which saw Bitcoin and other crypto assets plummet in value as President Trump's latest tariff threats against China sparked market panic and resulted in the liquidation of over $19 billion in crypto assets.
However, the company said the suspension was not intended to profit from it, as some social media users had speculated.
Jasper De Maere, trading strategist at Wintermute, told Decrypt that the pause was due to the market crash triggering its internal rules, rendering them ineffective.
De Maere said the market maker follows a “highly disciplined trading approach” that includes maintaining delta neutrality – a hedging strategy that ensures no exposure to directional risk in price movements by taking multiple positions.
Market makers are responsible for continuously buying and selling cryptocurrencies, stabilizing prices, providing liquidity, and improving market efficiency, regardless of market fluctuations. This typically relies on a predefined set of rules and automated trading systems.
But those rules were broken during last Friday's market crash, forcing Wintermute to suspend operations and reassess its strategy.
“For example, if we take short positions in perpetual swaps for hedging purposes and those positions are liquidated (margin calls) during periods of extreme volatility, it can become very complex. You have to rethink your entire market-making strategy,” explained De Maere.
“The severity and speed of this liquidation chain reaction were extremely rare, making it almost impossible for us to continue market making during that time window.”
De Maere confirmed that Wintermute had briefly suspended trading for “a very short time” while it tried to clarify market conditions.
However, he declined to disclose the exact duration of the suspension or specify which internal rule was triggered or broken.
The Wintermute trading strategist also said it was "reasonable to infer" that other market makers were also affected last Friday.
For example, market maker LO:TECH also confirmed to Decrypt that they also briefly halted trading on Friday.
“Our system worked as expected: the risk engine’s circuit breaker was triggered, automatically removing our quote from the market,”
Marcus Horsley, CTO of LO:TECH, told Decrypt.
“The APIs of all the major exchanges were extremely unstable at the time, so it took us longer to restore all our trading positions in order to deal with these issues.”
Rumors quickly emerged on social media that the plunge was the result of a “coordinated withdrawal of liquidity” by market makers in an effort to profiteer.
LO:TECH denied the claim, emphasizing that its trading system is fully automated and there is no human manipulation.
Regardless, when market makers are forced to suspend trading, the market does experience a substantial shock.
Matthew Nay, a research analyst at Messari, told Decrypt,
“The suspension of market makers’ operations would lead to a sharp drop in liquidity in the order book, which would in turn lead to more severe price fluctuations.”
Greg Magadini, head of derivatives at Amberdata, added that this situation can lead to significant price disconnects between exchanges.
But he also defended the market makers’ retreat:
“You can understand it this way: a large market maker may maintain quotes on multiple exchanges such as Binance, Bybit, OKX and Deribit at the same time.
Ensure that the bid-ask spreads on these markets remain consistent and fluctuate in tandem.
The problem is that once the auto-deleveraging mechanism is triggered,
Market makers can no longer be trusted to hedge their positions,” Magadini explained to Decrypt.
He further explained that in traditional financial markets, clearing houses usually provide protection for traders’ potential losses;
Some crypto exchage also have insurance funds to deal with similar risks.
But he said that last week several exchanges, including Hyperliquid, chose to enable automatic deleveraging mechanisms.
Once the counterparty’s position is liquidated, the profitable party’s position will be forcibly closed.
“These gains may just be to offset losses on other exchanges.
This makes providing liquidity in this highly fragmented market environment extremely risky and unpredictable."
Magadini said.
“If you are a market maker and you cannot trust the integrity of your hedging mechanism,
The only thing to do is exit the market.”
Ultimately, Wintermute's De Maere said,
“If we can continue to make markets safely and in a delta-neutral manner, we will do so.”
But in last Friday's extreme flash crash, this condition was simply not met.
