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Another dumb set of market structure questions, this time with a setup: I've heard a lot of opinions about the FTX-Alameda-Blockfolio integration with the consensus that it's not a good thing to have the exchange, broker & market maker all under one roof. My question is - Why?
The first obvious angle is the broker best execution argument. FTX isn't obligated to give customers the best price and can extract more money from users than it otherwise *should* or *could* if best-ex laws were in place. But this is not an FTX-only issue.
Most crypto exchanges house their own brokerages & attract retail users to their own unique ecosystem. Coinbase, Kraken, Gemini, etc... all face the same conflict of interest (customer transaction cost vs. personal profit). Let's put this to the side for now.
Another angle is the exchange + MM combination - FTX and Alameda coordinating their actions/sharing data is probably not a good thing. BUT - we have precedent here, specifically with CME:https://twitter.com/HideNotSlide/status/1323285688981327873?s=20 …
CME housed its own FX market maker for years that traded against its own customers & was kept completely separate from the rest of the exchange. They quietly shuttered it a few years ago, but they weren't forced to. The CFTC didn't say it was illegal.
The only issue I have with an exchange + MM combination is data sharing. An exchange can see 100% of the activity on its market, and a MM can't. If FTX is sharing all its data with Alameda, that's an unfair & unethical advantage. But do we know if this the case?
As long as FTX & Alameda aren't sharing any data between each other I honestly don't see a huge issue with their exchange/MM relationship. Am I missing anything with this angle?
The last angle is the MM-broker tie up. We also have a precedent here in the US equities world - PFOF/broker internalization of retail flow. If Robinhood wants to & is allowed to internalize its own flow, isn't that effectively a MM-broker tie up? Is that unethical?
To conclude, I think as the structure currently stands the FTX - Alameda - Blockfolio tie up is not perfect. There is room for unethical behavior to appear. BUT - if best ex & data sharing rules are put in place, the unethical behavior in theory can't happen... right? Right?
The question here is - what's the line between vertical integration (all chains of order flow/liquidity provision under one roof to cut costs) and shady activity (extracting more money from customers & hindering competition)? The line is thin. Where is FTX on the line?
I'm still learning in this arena & this whole thread may end up sounding incredibly dumb. Thanks in advance for teaching/helping me understand & learn 
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