Dec 27, 2025, 10:48 AM ETInterview, Fireside Chat, Podcast

Liquidations, Leverage, and Market Structure Under Stress · Doug Colkitt

Doug Colquitt has a computer science background and began his career in High-Frequency Trading (HFT) at Citadel in 2008, specifically focusing on Asia-Pacific equity markets during the financial crisis.
After leaving Citadel, he traded individually starting in early 2012, focusing on CME index and bond futures.
Colquitt operated a medium-frequency trading firm in the VIX complex (e.g., VXX, XIV) around 2015–2016, capitalizing on ETF rebalancing inefficiencies.
He subsequently ran a large market-making operation in Turkish equities, leveraging the market's transition to a fully electronic stack.
In 2020, Colquitt transitioned to cryptocurrency, initially engaging in Decentralized Exchange (DEX) arbitrage and MEV (Maximal Extractable Value) trading.
He describes crypto trading as 24/7 and highly automated, noting that unlike traditional markets, there are no scheduled breaks for developers.

Perpetual futures are described as a major crypto innovation allowing leveraged exposure to assets without fixed expiries, using a "funding rate" mechanism to tether prices to the underlying asset.
If the perp price trades above the spot price, long positions pay shorts; if below, shorts pay longs to incentivize price convergence.
Colquitt highlights the risk of "synthetic leverage" in DeFi, where traders open offsetting positions on multiple venues to earn token airdrops without a genuine market view, creating hidden systemic risk.
Traditional HFT arbitrage often requires capital, whereas DeFi allows for "flash loans" where capital is borrowed and repaid within a single transaction to capture price discrepancies with zero upfront capital.

The event resulted in approximately $20 billion in liquidations, marking the largest single-day liquidation event in crypto history.
The cascade was driven by a combination of high leverage on Perpetual DEXs and the withdrawal of market makers from order books during periods of extreme volatility.
Colquitt explains the "auto-deleveraging" (ADL) mechanism, where exchanges force close profitable positions to cover the losses of liquidated traders when insufficient liquidity exists in the order book.
A critical failure mode identified was the "tail wagging the dog" effect: centralized exchanges liquidated spot holdings (used as collateral) to cover perp losses, exacerbating price drops in the spot market.
Traders who believed they were hedged across different exchanges were wiped out because margin is siloed; a liquidation on one exchange does not offset profits on another.
The Hyperliquid insurance vault (backstop) absorbed significant liquidations but was eventually liquidated itself, demonstrating that even backstop mechanisms carry risk.
Colquitt notes that centralized exchanges often lacked transparency regarding their ADL rules, including undocumented exemptions for certain large players.

Colquitt is building a new Perpetual DEX on a custom chain named "Fogo" and a project called "Ambient Finance," scheduled to launch by the end of the current year or early next year.
The platform aims to separate the clearinghouse function from the exchange interface, a structure borrowed from traditional finance to improve credit management and insurance.
A key feature of the new design is a dedicated insurance fund built from trading fees, allowing users to invest in the fund and earn yield by taking the opposite side of liquidations.
The system will utilize "dual flow batch auctions" in partnership with Jump Trading to reduce the advantage of speed-based predatory HFT, prioritizing price competition over latency.
Colquitt emphasizes that the new platform will be fully open-source to ensure transparency regarding liquidation rules and risk management mechanics.
The architecture aims to be interoperable, allowing other exchanges to plug into the shared clearinghouse layer while experimenting with their own front-end models.

Colquitt expresses confidence in the future of Real-World Asset (RWA) tokenization, predicting it will eventually displace traditional brokerage settlement rails due to superior speed and mobility.
He observes a significant shift in regulatory and banking sentiment, with institutions moving from avoidance to active integration of crypto rails and stablecoins.
Colquitt believes that once regulatory hurdles are cleared, the friction of moving tokenized assets (stocks, bonds) will be significantly lower than current cross-brokerage transfers.
He identifies the integration of crypto with traditional banking systems as the primary catalyst for enabling daily use cases like mortgage payments and debit card transactions.