GDAX will restore the balance of margin called users with company funds(blog.gdax.com)
blog.gdax.com
GDAX will restore the balance of margin called users with company funds
https://blog.gdax.com/eth-usd-trading-update-2-216a3b946ef6
51 comments
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
Seems like a good mea culpa, but time will tell how they really feel about making good on these promises.
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.
( *) 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.
They must be making a lot of money to be able to do something like this. I understood it to be millions of dollars.
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.
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.
The number could be fairly manageable.
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I'm wondering, do you suppose there is some sort of insurance for these types of eventualities?
Not off the shelf, no, not to my knowledge. This would probably fall under some kind of liability insurance contract and there are plenty of companies that would structure it for you. However, it would be a very complicated and expensive contract with the insurers demanding lots of financial and security audits as well as due diligence by field experts.
I've worked on an insurance deal in aerospace with an unproven launch vehicle and from where I was siting, it was just a guessing game based loosely on existing data and some invasive due diligence. These deals work because the insurance company is itself insured by other companies that spread the risk around enough that even a claim for the maximum amount wouldn't do much worse than wipe out a few months profit. No one insures for such large amounts with small unproven companies so the biggest risk for both parties is a systemic failure like AIG.
I've worked on an insurance deal in aerospace with an unproven launch vehicle and from where I was siting, it was just a guessing game based loosely on existing data and some invasive due diligence. These deals work because the insurance company is itself insured by other companies that spread the risk around enough that even a claim for the maximum amount wouldn't do much worse than wipe out a few months profit. No one insures for such large amounts with small unproven companies so the biggest risk for both parties is a systemic failure like AIG.
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?
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.
> 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?)
Sorry, as a non-finance-savvy person: 3% of what? (I guess also: what is a 'circuit breaker' in this context?)
If the index (presumably the Nikkei, similar to the S&P 500) drops 3% in a single day, the stock exchange will stop all trading for a period of time.
This gives people the chance to cool off and not sell blindly in a panic, hopefully returning behavior to normal.
It also gives people the chance to intercept automated systems (stop-loss orders, things like that) if it's clear that e.g. it's a "flash crash" and not a more legitimate (for lack of a better term) drop.
It's a circuit breaker in the same way that a regular one works: It stops all activity (all trading) in order to protect the system (the economy) in the event that too much current is flowing through (too many sell orders, or too much volatility in the market).
This gives people the chance to cool off and not sell blindly in a panic, hopefully returning behavior to normal.
It also gives people the chance to intercept automated systems (stop-loss orders, things like that) if it's clear that e.g. it's a "flash crash" and not a more legitimate (for lack of a better term) drop.
It's a circuit breaker in the same way that a regular one works: It stops all activity (all trading) in order to protect the system (the economy) in the event that too much current is flowing through (too many sell orders, or too much volatility in the market).
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).
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).
> 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.
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.
Also gives them a huge reason to operate as a fractional reserve.
This will not end well.
This will not end well.
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This is not a real company. I have support requests from May 23 that still have not received any response.
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.
"not my life savings but not a trivial amount for me"
sounds like you really should consider lowering your stake in this crypto gambling
sounds like you really should consider lowering your stake in this crypto gambling
> 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.
> 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.
Exactly my thoughts. You invest based on your belief in true value. You speculate to exploit volatility.
If you are investing you don't want stop loss order. Your belief is that long term it will bring you returns regardless of temporary volatility.
If you speculate, it's your fault you used that or another strategy. You may call yourself lucky to get your "investments" back from the exchange but understand that this is being paid by other users of the exchange, in the long run.
I hope this is going to be a valuable lesson for a lot of people who do not really get what this game is about.
If you are investing you don't want stop loss order. Your belief is that long term it will bring you returns regardless of temporary volatility.
If you speculate, it's your fault you used that or another strategy. You may call yourself lucky to get your "investments" back from the exchange but understand that this is being paid by other users of the exchange, in the long run.
I hope this is going to be a valuable lesson for a lot of people who do not really get what this game is about.
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.
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.
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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?
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.
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.
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).
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).
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.
i dont think that will work. wait until real sums are involved and see what happens.
its not a business model to pay users for their own mistakes unless the system is rigged in some way anyway. just my opinion.
My immediate thought was whether someone might be able to induce the behavior. That combined with self-dealing (owning both the buying and selling accounts) could extract significant profits from an exchange that is willing to make its customers whole.
I would never do such (I consider it unethical, but more to the point I have neither the capital nor risk tolerance to pull it off), but I wonder if someone might. Or perhaps already has.
I would never do such (I consider it unethical, but more to the point I have neither the capital nor risk tolerance to pull it off), but I wonder if someone might. Or perhaps already has.
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.
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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.
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.
Unless it's an issue with the trading platform itself and they think this is cheaper than a class action lawsuit.
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It is probably also illegal for them to compensate some customers and not others. There are FINRA regulations against that.
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."
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."
Exactly. There are a lot of problems with compensating customers who lose money. This is why it is unethical for Financial Advisors to do that.
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.
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
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
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.
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.
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
A few seconds is normally long enough for liquidity to transfer between markets and this time it wasn't. That's the issue
this is how GDAX can be a unicorn!
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.
Moral of the story: even if you do not grasp basic financial instruments, in cryptocurrency you can still be saved because of reputation.
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?
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 ?
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.
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?
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.