Exchanges
Anyone getting involved with leveraged trading must assume upon themselves the risks associated with the potentially highly rewarding practice. A recent event should remind traders that, sometimes, even when the trade goes your way, you can still take a hit. Okex socialized one trader’s massive loss on BTC futures with a clawback.
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Forced Liquidation
Okex, the Chinese-run cryptocurrency exchange based in Hong Kong, has announced on Friday that “an enormous long position” in BTC0928 futures contract was force-liquidated on July 31, 2018. And due to the sheer size of the order, worth over $400 million, the uncovered loss (about $9 million) will need to be socialized with a clawback.
According to the venue’s societal loss risk management mechanism, when the insurance fund cannot cover the total margin call losses, a full account clawback occurs. In such case, users who have a net profit across all three contracts for that week will be subject to the clawback. “We will take a portion of the profit in equal percentage from all profited traders only to cover the difference between the liquidated price and settled price.”
Incident Report
Detailing the incident, the exchange wrote that: “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. Shortly after this preemptive action, unfortunately, the BTC price tumbled, causing the liquidation of the account.”
The Okex team added that: “In order to prevent socialized clawbacks from occurring, we have been working really hard to optimize our risk management system, such as launching price limit rules, early forced liquidation system, forced liquidation order price adjustment and more. There have been malicious rumors accusing us of manipulating the forced liquidation system. We hereby would like to point out the fact that, most of the similar price movements in the market are caused by forced liquidation orders.”
Won’t Happen Again?
In order to reduce the market risks induced by this incident, Okex said it is injecting 2500 BTC from its own capital pool into the insurance fund and will monitor the settlement to prevent manipulation attempts. These actions will help reduce the socialized clawback ratio of the week.
The exchange also announced it will implement a series of risk management enhancements, which are meant to prevent any similar cases from occurring again. These include a new anti-manipulation policy; a mark price to be released at the end of August; a tiered margin system & optimized process of forced liquidation and an optimization of insurance fund usage to be released in September.
Is this a fair way for a trading platform to handle such situations? Share your thoughts in the comments section below.
Images courtesy of Shutterstock.
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