GDAX will restore the balance of margin called users with company funds

https://blog.gdax.com/eth-usd-trading-update-2-216a3b946ef6

by tstyle • 9 years ago

82 46 9 years ago

blog.gdax.com

nugget• 9 years ago

They must be making a lot of money to be able to do something like this. I understood it to be millions of dollars.

This really depends on how many stop loss orders were there and how users are refunded. I.E. will people be refunded in current price of ethereum or in the amount their stop loss order was set to be executed on?

The number could be fairly manageable.

Gaessaki• 9 years ago

I'm wondering, do you suppose there is some sort of insurance for these types of eventualities?

DINKDINK• 9 years ago

There was about 128,000 in volume, Assuming worst case scenario, it appears that the compensated loss would be ~$40 million dollars. If you assume buy limit order book was triangular it's about ~$25 million dollars. That's about 100-200 days of ether trading fees.

modeless2• 9 years ago

This is interesting because it gives them a huge incentive to prevent this from happening again, if it costs them millions of dollars each time. I wonder what changes they will institute?

TrainedMonkey2• 9 years ago

Couple things they could do:

1. Rejecting the orders that will wipe out the order book.

2. Doing something hedge-fundy. Becoming counterparty or running the darkpool that let's other people jump on that.

3. Do nothing - there is now an incredible amount of limit orders from people kicking themselves for not doing something like that earlier (I've got a few:P).

runeks• 9 years ago

1. Rejecting the orders that will wipe out the order book.

So, allow speculators to place as many bets as they want and prevent people who want out from getting out? Let everyone in, and when they become over-leveraged, prevent them from escaping? Rejecting sell orders (which can cause these things, if they're large enough) is not an exchange, but some form of casino.

TylerE• 9 years ago

Also gives them a huge reason to operate as a fractional reserve.

This will not end well.

jzwinck• 9 years ago

Presumably a circuit breaker. Many exchanges have these now. The Japanese stock exchange has a particularly nice one which pauses every 3% for people to think about what they are doing. That makes stop loss orders behave more in line with people's expectations.

JadeNB• 9 years ago

The Japanese stock exchange has a particularly nice one which pauses every 3% for people to think about what they are doing.

Sorry, as a non-finance-savvy person: 3% of what? (I guess also: what is a 'circuit breaker' in this context?)

hnaparst3• 9 years ago

This is not a real company. I have support requests from May 23 that still have not received any response.

kev0092• 9 years ago

I had around $151k at the day's value wiped out as one data point (my fiat cost basis on entry was lower, not my life savings but not a trivial amount for me). Had a very busy week and didn't grok it was gone until Thursday afternoon. It actually felt cathartic to feel the feeling of losing $150k in the sense I was thinking "ok if I can accept dealing with that failure I can deal with any business fiasco when I start one".. and now somewhat surreal to get it back.

shizzlest3• 9 years ago

"not my life savings but not a trivial amount for me"

sounds like you really should consider lowering your stake in this crypto gambling

shoo• 9 years ago

An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
We must prevent our readers from accepting the common jargon which applies the term "investor" to anybody and everybody in the stock market.
Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities for profit and loss, and the risks therein must be assumed by someone. There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.
In our conservative view every nonprofessional who operates on margin should recognise that he is ipso facto speculating, and it is his broker's duty to advise him as such.
The true investor scarcely ever _is forced to sell_ his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by _other persons'_ mistakes of judgment.

- Benjamin Graham, "The Intelligent Investor"

Note that Graham is largely talking about common stocks - interests in potentially profitable businesses with real world assets than have a value independent of the current market price.

Betting any amount of capital on exchange rate changes of currencies? On cryptocurrencies? ...on margin that forces you to sell if the market price fluctuates? ...when the market price itself is largely/entirely based on speculation? This is not classifiable as investment activity, and arguably not classifiable as intelligent speculation either.

TaylorGood• 9 years ago

I know a crypto trader who lost $95k during that GDAX fiasco and I was in a group chat with him while it happened. It WAS his life savings in that he was going to buy a house with it. Started talking about having to find a job.

I've been in crypto for 18 months and at the start put a sizable piece of my networth in WAVES ICO. I missed the ETH ICO even after CTO friend said to get in that ICO but WAVES is up like 2500%+

Now cryptocurrency overall is less than 10% of my networth and I've avoided most ICOs since.

nodesocket2• 9 years ago

Wait I'm confused... The market moved dramatically and quickly, which can happen dealing with something as speculative as cryptocurrency, and yet they are refunding people? Did I miss something? Isn't this part of the risk investing?

hnaparst3• 9 years ago

It is probably also illegal for them to compensate some customers and not others. There are FINRA regulations against that.

nodesocket2• 9 years ago

If people could get refunds in the US stock market because of flash crashes, algo trading, that sort of doesn't make the market a balanced market anymore.

See 2010 flash crash. "Procter & Gamble in particular dropped nearly 37% before rebounding, within minutes, back to near its original levels. The drop in P&G was broadcast live on CNBC at the time, with commentator Jim Cramer commenting."

atomical• 9 years ago

Problems:

1) Flash crash 2) Horrible customer support 3) Delayed Ethereum widthdrawals when the network isn't under stress

They have a lot of problems. They may be happy to spend the money to clean up one of them.

ty_a• 9 years ago

Unless it's an issue with the trading platform itself and they think this is cheaper than a class action lawsuit.

kev0092• 9 years ago

It takes a few hundred ETH to have worthwhile leverage.. so they probably risked losing a substantial amount of trade volume and liquidity with the fiasco aside from loyal customers and early adopters. It wasn't just the natural market forces. They directly manipulated the market by stopping trading, and indirectly during and after the event with a variety of system issues that are not comforting.

IMO this move to replenish traders was a mature business decision that many tech companies would have failed at let alone crypto companies. There is massive money in the long game for Coinbase/GDAX, and providing real and imaginary assurance could cement them to become the Visa of the next decades.

civilitty2• 9 years ago

That's the rub with BTC: technical and security problems have historically plagued BTC companies with huge amounts of money lost. GDAX giving a FDIC-lite guarantee sets them far apart from the rest, even if their customer service and interface is inferior.

peloton• 9 years ago

There wasn't market manipulation here on GDAX's part. The people they are compensating are those who got wiped because they were trading on margin (if anyone is not familiar, this adds much more risk). These people already had their portfolios auto-liquidated via the margin call so stopping trading afterwards had no impact. Same with stop loss orders, although there's a different mechanism at play there.

From GDAX's point of view the tradeoff boiled down to whether to invest in PR / brand today or risk a moral hazard problem in the future (users expecting bailouts so they take more risk).

fred_is_fred• 9 years ago

Agreed. People who trade on margin know they are taking a risk and if they don't know then they need a lesson. They are gambling with someone else's money.

tootie• 9 years ago

They are derisking speculation by offering a bailout to the losers. This will increase risk tolerance and lead to wilder speculation. Until the next crash when no one is bailed out and investors cry foul.

vii2• 9 years ago

It seems that the price plummet only occurred on the GDAX ETH-USD market. Even the GDAX BTC-ETH market hasn't the spike. Normally there are many bots ferrying liquidity between these markets so this suggests that the ETH-USD market was not giving willing traders a chance to place orders. Their first blog post indicated it was working perfectly, in which case a design rethink is in order.

Coinbase regularly goes down when there is heavy trading. Very decent of them to publicly refund people for this incident, but given they have regular Ethereum trading issues, they should be quicker to suspend their market and more humble about the technical issues they're facing

modeless2• 9 years ago

This was not a technical issue. Everything worked exactly as designed. A large market sell order reduced the price to a level that triggered other sell orders (a combination of "stop-loss" and forced liquidation for margin positions) in a cascade. This was a flash crash that was over within a few seconds, so other markets did not react.

The issue is that there are a lot of inexperienced traders on GDAX right now and they were recklessly trading on margin and/or setting stop-loss orders without understanding the possible consequences.

vii2• 9 years ago

During the crash, if the market were functioning normally, people could have bought cheap ETH in the ETH-USD market and sold it at nearly the normal price via the ETH-USD and BTC-USD markets all without leaving GDAX. Their outage page has the grace to mention that there were slowdowns.

A few seconds is normally long enough for liquidity to transfer between markets and this time it wasn't. That's the issue

ryen• 9 years ago

Seems like a good mea culpa, but time will tell how they really feel about making good on these promises.

danmaz742• 9 years ago

Mea culpa for what? For greedy traders* not understanding the risks of margin trading?

( *) I'm playing with small money on poloniex as a greedy trader. I made +400% in 3 months, but I don't expect to be refunded if I lose everything for a mistake I made. I would only hope for a refund in case of a bug-related issue.

jnwatson• 9 years ago

Losing your entire account is not a normal risk of margin trading. They were way too quick on the margin calls.

amazingandyyy• 9 years ago

this is how GDAX can be a unicorn!

mrleiter• 9 years ago

This is really a curious instance. Those people whose savings have been wiped out have been hit so hard because they had stop orders, not limit orders. The main difference is that once the stop point has been reached, a stop order becomes a market order and then is filled at market rate. So yes, a stop order at, e.g., 300$ turns into a market order for 300$ and it may be that you are filled at 1$ if there is huge market movement downwards.

Moral of the story: even if you do not grasp basic financial instruments, in cryptocurrency you can still be saved because of reputation.

justinjlynn• 9 years ago

This is the basic definition of moral hazard. If the exchange had reason to believe a trader didn't even know the basic characteristics of the orders they were placing what business have they engaging with them at all?

shizzlest3• 9 years ago

one has to wonder why the exchange gives away their own money. trying to make the speculators feel that everything is fine and dandy in crypto gambling land ?

joosters• 9 years ago

Are you claiming that exchanges in cryptocurrency have a good reputation? They get 'hacked' on a regular basis and lose customer money so frequently that it's barely new any more. What on earth do they have to do to get a bad reputation in your eyes?

Blackthorn• 9 years ago

There are also people who were hit because they got margin called. The process here seems a bit ridiculous and the compensation completely understandable. If Interactive Brokers gives me a margin call, I have a couple days to cough up the funds. They don't immediately liquidate my account.

nihonde• 9 years ago

This business of correcting errors to keep incautious crypto-speculators whole is going to kill ETH. Let the people who trade on margin fall. At the end of the day, the critical stability of the currency depends on people like me, who speculate with disposable income, and not on suckers with margin accounts. I have a lot invested in this currency, but it's still less than a quarter of my YTD gain on actively managed mutual funds. If ETH drops to USD0.01, my account sits still until we hit sell pressure again.

Hekatron• 9 years ago

I think we are in for a huge pump on GDAX, because they now have to buy a shitton of ETH to make their customers whole(or if they give them cash, the customers will be buying a ton of ETH to get their holdings back)...and they will be buying it from GDAX exchange, add that buying pressure to the EEA announcement later this month that will give it an extra boost, and we'll pass the ATH and then its up to the next level up

GDAX will restore the balance of margin called users with company funds

Related Stories