It’s fine if you have automated margin calls every 30 seconds and you can blow out somebody’s position quickly enough not to lose money. Which is what FTX allegedly had set up… for every trader except Alameda.
The issue here was the risk-management system didn't work for this trader.
What it sounds like, although it isn't totally clear, is that this guy worked out how to exploit their margin call system by running up an illiquid coin using FTX money, cashing out, and leaving FTX holding the bag.
No it's not really. It would not have been possible to sell the shit coin collateral for the amount loaned against it at any point. By the time FTX had liquidated half the collateral the coins liquidity would be gone and the rest of the coins would be worthless. There was no point in time where these loans were solvent, they were just pumped so they looked solvent on paper.
They could calculate margin based on the liquidation value of collateral given the current state of the order book instead of mark-to-market value but I don't know if they did that.
