Hyperliquid has stirred up Wall Street, with regulations uncertain and market makers fleeing first?

Author: Chloe, ChainCatcher

Yesterday, two addresses marked by the market as mainstream market makers on Hyperliquid withdrew nearly 90% of BTC and ETH liquidity within the same time frame, with a total estimated withdrawal of nearly $100 million.

Coincidentally, just three days ago, the two largest traditional exchanges in the world, CME and ICE, joined forces to pressure the U.S. CFTC and Congress, demanding strict regulation of Hyperliquid.

Is this merely a singular event of professional players pricing in "regulatory risk," or is it a sign that the regulatory arbitrage benefits enjoyed by DEX over the past three years are coming to an end?

Market Makers Withdraw Simultaneously, Reducing Holdings by Nearly $100 Million

According to on-chain intelligence platform Hyperinsight, on May 18, two addresses marked by the market as mainstream market makers significantly reduced their market-making exposure within a few hours: one address had previously provided liquidity for 175 cryptocurrencies, with a market-making scale of about $45 million for BTC alone, which was completely closed out on the morning of May 18, withdrawing about $6 million to Binance.

The other address's BTC + ETH liquidity plummeted from about $40 million to about $4 million, a decrease of approximately 90%; the total position size dropped from nearly $80 million to about $41 million. Although it still maintained orders for 111 cryptocurrencies, the order book depth for mainstream cryptocurrencies noticeably thinned.

For a derivatives platform that relies entirely on on-chain order book matching, the simultaneous withdrawal of two mainstream market makers during the same period will significantly increase the execution costs of large trades.

If we pull the timeline back three days, on May 15, Bloomberg was the first to report that CME and ICE had expressed concerns to CFTC officials and congressional members regarding Hyperliquid, believing that this rapidly growing on-chain perpetual futures platform could pose trading risks to traditional commodity markets, particularly crude oil.

The specific demands from the two exchanges were very clear: they requested that Hyperliquid register with the CFTC, implement KYC, and accept trading surveillance. The reason given was that Hyperliquid's anonymous, year-round derivatives trading environment could distort global oil price benchmarks and provide a workaround for sanctioned entities.

Trabue Bland, Senior Vice President of ICE Futures, directly stated, "This is a matter of benchmark integrity." CFTC Chairman Michael Selig has publicly stated multiple times that the CFTC will establish a clear regulatory framework for emerging products like crypto perpetual contracts and has expressed concerns about the activities of offshore platforms like Hyperliquid.

Upon hearing this news, the HYPE token dropped from above $45 to below $43, a decline of about 6%.

The Pie Divided Among Wall Street, Hyperliquid Gets Labeled

But why now? Hyperliquid has crossed Wall Street's bottom line.

According to several foreign media reports, the key trigger point is HIP-3, a feature that Hyperliquid launched early last year, allowing users to trade contracts for traditional assets like oil and stocks directly on-chain. In late February, as geopolitical tensions escalated and the traditional futures market was closed over the weekend, Hyperliquid's oil contract trading volume experienced explosive growth.

Hyperliquid has been continuously expanding its market share through features like HIP-3, which is precisely the domain long dominated by CME and ICE.

According to data from crypto intelligence provider Kaiko, Hyperliquid's oil contract cumulative trading volume surged from $339 million at the end of February to $7.3 billion at the end of March, growing more than 20 times in just a few weeks.

Looking at Hyperliquid's overall position in the on-chain derivatives market, according to DeFiLlama data as of mid-May 2026, Hyperliquid's 30-day perpetual contract trading volume was about $176.4 billion, with a 24-hour trading volume of about $7.9 billion and open interest of about $9.3 billion, resulting in an annualized trading volume of about $2.15 trillion.

In the on-chain perpetual DEX market, Hyperliquid accounts for 31.7% of the 30-day trading volume but holds 58.5% of the open interest in that field, meaning it carries nearly 60% of the on-chain perpetual liquidity.

Moreover, looking at the cumulative values for Q1 2026, Hyperliquid processed about $619.46 billion in perpetual trading volume for the entire quarter, achieving a market share of 34% to 44% during the quarter and accounting for about 53% of the fee income in that field, with revenue of about $820 million over the past 12 months.

For CME and ICE, Hyperliquid is no longer an experimental market but a direct competitor that is eroding their cash flow during weekends and after-hours trading.

CryptoSlate's analysis further points out that if regulators accept the narrative framework presented by CME and ICE, the enforcement focus will fall on Hyperliquid's commodity markets, with oil perpetual contracts potentially facing access restrictions, oracle disclosure requirements, or front-end geographic blocking, while the crypto-native markets (BTC/ETH perpetual) would be categorized under a different regulatory category.

Thus, the withdrawal of market makers during this period is quite reasonable.

Looking back, in October 2025, the crypto market experienced a $19 billion liquidation wave, causing several market makers to temporarily halt quoting. Wintermute strategist Jasper De Maere later explained to Decrypt: "We take a very rules-based approach; if we cannot market make in a safe, delta-neutral way, we will not participate in this game."

Galaxy's Magadini also stated: "If you are a market maker and cannot trust the integrity of your hedging tools, the only thing you can do is exit."

Now, as regulatory uncertainty around DEX rises sharply, with platforms potentially required to implement KYC and possibly banning U.S. users, for mainstream market makers, withdrawing is simply a standard operating procedure written into their risk manuals.

Smart Money Pricing in Regulatory Risks in Advance?

In response to recent events, Hyperliquid immediately countered through the HPC, asserting that the on-chain perpetual contract market is "more efficient and lower risk" compared to traditional centralized exchanges, and hopes that the CFTC can develop a tailored regulatory framework for on-chain derivatives platforms. HPC has also proactively engaged with the CFTC to discuss establishing a legal participation pathway for U.S. users.

The Hyperliquid Policy Center (HPC) is positioned as an independent research and advocacy organization focusing on the regulatory framework for perpetual derivatives and on-chain financial infrastructure, established with a funding of 1 million HYPE tokens from the Hyper Foundation under the Hyperliquid ecosystem in February this year.

The organization is led by Jake Chervinsky, a seasoned crypto policy lawyer who serves as founder and CEO. Chervinsky previously held the position of General Counsel at crypto venture firm Variant and Policy Director at the Blockchain Association, making him one of the most well-known lawyers in the crypto space within Washington's policy circles.

Finally, in the short term, the withdrawal of market makers from Hyperliquid can be understood as "smart money pricing in regulatory risks in advance." It is reasonable to assume that institutions would not wait for the CFTC to take action before making moves; reducing exposure is merely following compliance SOP.

In the long term, this incident may mark an important turning point: the triple arbitrage benefits that DEX has relied on—time arbitrage, geographic arbitrage, and asset arbitrage—are being repriced. These three arbitrages are essentially "regulatory vacuum benefits," which could be enjoyed without cost when Hyperliquid was still an experimental platform. However, once it begins to intersect with traditional finance, Wall Street will inevitably push it into the regulatory game rules.