July 31st would be marked as a seminal event in the history of cryptocurrency exchanges as OKEx was forced to liquidate a large order when an order worth $460 million of a bitcoin long position was called but only $420 million worth was not filled.
OKEx clarifies and maintains order in the futures market by injecting 2500 BTC
On July 31, 2018, OKEx had an enormous task at hand. A long position of BTC0928 futures contract was to be force-liquidated and for the first time due to the enormous size of the order, the exchanges risk management system triggered and activated its societal loss risk management mechanism.
OKEx Maintains Order in the Futures Market by Injecting 2500 BTChttps://t.co/TQUS9MoRPb
— OKEx (@OKEx_) August 3, 2018
To explain in futures markets, the short positions pay the profits of long positions and vice versa, depending on which side the bitcoin price moves. If an insolvent trader is forced out of position in a low liquidity profit, then their counterparty trader is essentially earning money from this loss. In and real-time exchange scenario where, multiple trades happen every hour if there aren’t sufficient losses on one side to pay for profits on the other side, which means traders who took a profitable position will lose money. This is a “social loss” and the futures trading community loses. This is not unusual and has happened before, and that’s why exchanges get insurance. It protects them in the event of “worst case scenario” situations like this.
OKEx has adopted the societal loss risk management mechanism since launched in January and it has been working orderly as intended. When the insurance fund cannot cover the total margin call losses, a full account clawback occurs. In such case, only users who have a net profit across all three contracts for that week will be subject to the clawback.
How this situation arises is explained by OKEx’s press release
“The client with user ID 2051247 initiated an unusually large long position order (4168515 contracts) at 2am on July 31 (HKT) and triggered our risk management alert system. Our risk management team immediately contacted the client, requesting the client several times to partially close the positions to reduce the overall market risks. However, the client refused to cooperate, which lead to our decision of freezing the client’s account to prevent further positions increasing 2. Shortly after this pre-emptive action, unfortunately, the BTC price tumbled, causing the liquidation of the account.”
OKEx takes steps to reduce market risk
To reduce the market risks induced by this incident, OKEx reacted quickly and planned to execute some actions
- OKEx would be injecting 2500 BTC from OKEx’s own capital pool into the insurance fund.
- During the settlement at 4 pm August 3, 2018 (HKT), if any attempts of malicious manipulation of the settlement price are found, the exchange will delay the settlement process for 10 minutes and manually adjust the price back into a reasonable level before delivery or settlement. The account which made the malicious attempt will be suspended immediately.
The Exchange believes that it is taking this action so it can largely reduce the socialized clawback ratio of this week
It will implement a series of risk management enhancements, which are in line with our futures roadmap released on earlier in, to prevent any similar cases from occurring again.
This social clawback will definitely anger the exchange’s trader community and it could face a large pull of customers especially on the derivative front. This also leaves a lesson for other exchanges to strengthen their risk management system so that such an event doesn’t happen again
Is OKEx risk management policies enough to stop a similar incident in the future? Do let us know your views on the same.
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Nilesh Maurya has been associated for past 8 years as an Investment Banker with Omega Capital, a bespoke Investment Banking outfit having offices in Mumbai, New York, Singapore, and Dubai. He has been a regular contributor to business publications such as Business India and Market Express and has been a mentor to many start-up companies. Nilesh Maurya has been associated for past 8 years as an Investment Banker with Omega Capital, a bespoke Investment Banking outfit having offices in Mumbai, New York, Singapore, and Dubai. He has been a regular contributor to business publications such as Business India and Market Express and has been a mentor to many start-up companies. Follow him on Twitter at @KoinKing1 or connect with me on linkedin.