GDAX Ethereum Flash Crash
The backlash from clients following the Ethereum flash crash prompts GDAX to refund all losses suffered from stop-loss orders. An amiable gesture but a terrible blow to cryptocurrency trading and here's why.
Trade of the Year
On 21 June 2017 at 12:30pm PT, a multimillion dollar market sell was placed on the GDAX ETH-USD order book. This resulted in orders being filled from $317.81 to $224.48, translating into a book slippage of 29.4%. This slippage started a cascade of approximately 800 stop loss orders and margin funding liquidations,causing ETH to temporarily trade as low as $0.10.
Needless to say, there were a number of very unhappy customers. Just a few days later, GDAX (Coinbase) decided they were going to refund all the customers who
got screwed should not be trading.
We will establish a process to credit customer 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 price movement at 12.30pm PT on June 21, 2017
We view this as an opportunity to demonstrate our long-term commitment to our customers and belief in the future of this industry. We will follow up directly with affected customers about this process next week.
Why this is bad
In reality this move was very shortsighted and detrimental to the industry, at least ethereum. Trading volume is already lower on GDAX although it is too early to tell if that will last.
The multi-million dollar sell order that wiped the book nearly clean was executed exactly as it should have been. Whether this was intentional or an accident (fat finger) will remain unknown.
Tip: Regarding order types, for those who aren't familiar, a limit order guarantees a price (but not a fill) and a market order guarantees a fill (but not a price).
Warning: Here's a well accepted piece of advice: dont use stop loss orders! GDAX market data feeds allow a trader to see every single order on the book meaning your stop loss order is sitting there just begging to be picked off. If you don't believe me go trade some stocks and set a trailing stop or stop loss. Watch what happens.
Comments on GDAX response
Pre-trade and post-trade safeguards can bring added stability to markets. We are exploring how protections such as maximum market order sizes and exchange circuit breakers may reduce the likelihood of rapid price movements.
Limiting order size is unnecessary and will surely reduce market participation. A LULD mechanism should solve the problem and prevent similar events from occurring in the future. In fact, this single change may be the only necessary change needed if implemented properly.
Margin trading is designed to amplify the effect of market movements. We are considering how margin calls and liquidation strategies can be used to manage the risk of loss while preserving the benefits of margin trading.
Simple. Change the liquidation policy to allow for a set amount of time between the margin call and programmatic liquidation. This poses far less of a risk than another potential bailout. Receiving a margin call and having to either liquidate holdings or be forced to watch ones holdings be liquidated would be a valuable learning experience for anyone trading a cryptocurrency on margin. Giving in to reddit tantrums and Twitter meltdowns is only going to make things worse in the end.
Market makers facilitate trading - narrowing spreads, decreasing volatility, and stabilizing markets. We are investigating how fee structures can incentivize market makers to improve liquidity and increase market depth on GDAX.
Please remember that although market makers facilitate trading the investors and traders facilitate the existence of the market. Altering the fee structure may improve liquidity but any improvements will come with the stigma of GDAX becoming just like a typical stock exchange. A LULD circuit breaker would be enough to avoid further implementations of a PFOF maker/taker type models;their biggest proponent Bernie Madoff would even agree.
Uptime and Availability
Market participants rely on uninterrupted access to market data and trade execution. We are investing heavily in our platform infrastructure to ensure GDAX continues to meet the expectations of our customers.
Probably a good idea. Another thought to consider is moving away from a web-based platform or offering a bare-bones version (web or desktop) to allow trading with less resource usage.
My Account Was Closed, So Who Cares.
If you are truly focused on supporting the industry's largest institutions and traders rather than the legacy customers of Coinbase then platform infrastructure improvements should be focused on colocation and FIX. Picking off orders crossing the spread that were placed via a web platform is almost as easy as, well, say picking off stop orders resting below the main band of liquidity on the book.
All cynicism aside, one can't help but be slightly impressed by this trader who I expect profited quite handsomely from their less than 1 minute trade. Let's assume that the remarkable drop in price was not caused by some fool who accidentally put an extra zero or used a market rather than limit order.