Earlier this week, GDAX, the digital currency exchange run by Coinbase, experienced a flashing accident in its USD Ethereum market.
Within seconds the price of ETH crashed from ~$ 320 to as low as $0.10. While the price recovered promptly, the rapid price motion caused many traders to experience margin calls or stop loss orders, resulting in potentially severe losses.
While many initially thought the flashing accident was the result of nefarious work, GDAX eventually confirmed that there was no indication of wrongdoing or account takeover.
Instead, the flashing crash was research results of someone placing a multi-million-dollar sell order at market price, meaning ETH would change hands at whatever price bidders were currently offering until the entire order was filled no matter how much lower the cost was than the current price of ETH.
Filling this order caused ETH costs to instantly slip 30% to $224 which in turn caused 800 stop loss orders and margin exterminations, which further drove the price down, to as low at $0.10.
Typically, person placing a large sell order would liquidate their position over time to minimize the downward effect on price. Also, GDAX reminds users who are about to initiate big sell orders that it will cause slippage in the market, entailing this trader most likely didnt care( or didnt understand) that his trade would move the market.
For anyone not familiar with trading and exchanges, a stop loss order is an order to sell stock( or cryptocurrency) when the cost fells to a certain level. Its basically used as a way to cut your losses.
Additionally, a margin funding extermination is when you borrow funds to go long and bet that an asset will rise in price, and if the cost instead falls, your position may be automatically closed to reimburse the party that lent you the money to go long. Both of these kinds of trades require assets to be sold, which further drives down the price.
Originally GDAX said that they would be honoring all of these orders, since the trades were legitimate and in accordance with their trading rules.
However, yesterday they announced that the exchange will be using company funds to reimburse customers who suffered losses as research results of a margin call or stop loss order executed.
We will establish a process to credit client accounts which experienced a margin call or stop loss order executed on the GDAX ETH-USD order book as a direct result of the rapid cost movement at 12.30 pm PT on June 21, 2017. This process will enable affected customers to restore the value of their ETH-USD account to the equivalent value of their ETH-USD account at the moment prior to the rapid price movement. GDAX
Notably the wont be reversing any trades, meaning if you were lucky enough to buy ETH at a low price during the flash crash, that trade is likely to be honored.
This is more of a sign of goodwill than an admission of any wrongdoing. GDAXs exchange performed just the route it was supposed to and the same way a market like the NYSE would function if a proportionally large market sell order was placed.
If anything, this should be a reminder to traders how risky it can be to trade on margin, and that cryptocurrency marketplaces can be just as unforgiving( and sometimes more) as other equity markets.
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