GDAX Bails out Margin Traders Affected by Ethereum Flash Crash

It appears as if the GDAX exchange has come to a conclusion regarding the recent Ethereum flash crash earlier this week. A lot of margin traders were not too happy about this development, resulting in hefty financial losses. GDAX immediately started an investigation to see whether or not something went wrong on their end. That is not the case, yet it appears the company will let affected users restore the value of their accounts regardless.

The ETH Flash Crash on GDAX Will Be Semi-Reversed

A lot of people were taking by surprise earlier this week, as they noticed the ETH/USD price crashed to US$0.10 on the GDAX platform. Considering how other exchanges were seemingly unaffected by this development, many people first assumed this was a technical glitch. That is not the case, as a lot of buy orders were effectively filled by this odd trading behavior. Moreover, a lot of margin traders on GDAX lost good chunks of money because their orders got liquidated in the process.

In most cases, very few exchanges will rectify this situation and return losses to margin traders. That is only to be expected, as margin trading is a high risk-  high reward kind of play. Traders take the sole responsibility for their margin trading positions and are expected to take profits and losses as they come along. In this particular incident, however, GDAX faced a lot of backlash, which forced them to make a very unusual decision last night.

More specifically, GDAX will create a new process to credit customer accounts affected by this flash crash earlier in the week. All affected customers will be able to restore the value of their ETH/USD account to the equivalent value of their balance at the moment prior to the crash. Anyone who had buy orders filled will not see trades reversed, though, which is good to see. Margin trading users will receive a “refund” from the GDAX team themselves.

Unfortunately, this a very dangerous decision by GDAX which could set an incredibly troublesome precedent. Bailing out margin traders for something that is not the company’s fault by any means should never happen in the first place. This can set a precedent in which margin traders will expect a refund every time the market responds in an extremely volatile manner. It is certainly possible companies other than GDAX would need to enforce such a rule in the future.

While it is commendable to see GDAX take such a bold course of action, the decision is causing a lot of social backlash already. Many people feel GDAX only does this because the traders in question suffer from issues with the Ethereum price. If it were Bitcoin, it is highly questionable the company would do the same as they are doing right now. Such statements are understandable, even though they are not exactly based on any real evidence.

Bailing out Ethereum users and traders is becoming something of a regular occurrence, though. Not too long ago, investors of The DAO were “bailed out” through a network hard fork. GDAX is now refunding ETH margin traders suffering from issues not caused by the company. A pattern is starting to form for those people who firmly believe in conspiracy theories, that much is certain. Margin traders can always cause losses, and it should not be up to service providers to bail out users if the “crash” is not a fault caused by the company itself.

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  • I’m pretty sure GDAX will implement some fail safe in the near future to avoid this type of outcome and make the users fully aware and responsible.

    1) Stop Limits would have mandatory minimum prices to fill the order.
    Sell if lower than X but not lower than Y with Y = 90% of X by default or something like that.

    2) Automatically slow down the selling if the price go down too fast or the sell order is too big compared to the available, at the time, buy orders.

    A sell order should be there to maximize the profits of the single order, not to trigger someone’s else stop loss and margin calls.

    • boblq

      Yes.
      I suspect GDAX did the numbers and saw this as a massive advertising opportunity at an acceptable cost. No doubt it will grow their margin trading volume. If they are going to encourage margin trading then they need to dampen fast downward spikes. This can be done by setting a limit on how large a sell order they will implement in any given trading period.

  • In fact, users interface for setting orders could be vastly improved.

  • Pascal

    I lot of margin traders lost a lot of money in the crash caused by the DAO hack. Is GDAX going to bail them out too? Where do you draw the line?

  • Chris Ridgeway

    If one actor has the ability to sell out the whole bids book.. You should be notified of that before being able to place a stop loss. These markets are too low-volume for margin trading in my opinion, especially when having access to the volume of a single exchange.

    Margin traders should be allowed to become aware of crucial metrics that make the waters that dangerous for swimming.

    As long as something like that can be put in place there is no precedent set, because realistically it is somewhat the exchanges fault for not providing some key information to traders.

    What if on the nasdaq you were margin trading with someone that had half the outstanding apple shares on that exchange in a margin account.. Something like that should be public info.

  • Rouan Van Der Ende

    someone picked up cheap ETH thats for sure