8 ms·

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

82 points by tstyle 9y ago

nugget 9y 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.
- TrainedMonkey 9y ago
  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 9y ago
    I'm wondering, do you suppose there is some sort of insurance for these types of eventualities?
    - civilitty 9y ago
      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.
  - deleted 9y ago
    [deleted]
- DINKDINK 9y 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.
modeless 9y 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?
- TrainedMonkey 9y 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 9y 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 9y ago
  Also gives them a huge reason to operate as a fractional reserve. This will not end well.
- jzwinck 9y 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 9y 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?)
deleted 9y ago
[deleted]
hnaparst 9y ago
This is not a real company. I have support requests from May 23 that still have not received any response.
kev009 9y 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.
- deleted 9y ago
  [deleted]
- shizzlest 9y 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 9y 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.
nodesocket 9y 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?
- hnaparst 9y ago
  It is probably also illegal for them to compensate some customers and not others. There are FINRA regulations against that.
  - nodesocket 9y 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."
    - hnaparst 9y ago
      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.
- atomical 9y 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 9y ago
  Unless it's an issue with the trading platform itself and they think this is cheaper than a class action lawsuit.
  - deleted 9y ago
vii 9y 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
- modeless 9y 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.
  - vii 9y 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 9y ago
Seems like a good mea culpa, but time will tell how they really feel about making good on these promises.
- danmaz74 9y 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 9y ago
    Losing your entire account is not a normal risk of margin trading. They were way too quick on the margin calls.
    - danmaz74 9y ago
      Depends - if you go long on X and your collateral is all (or mostly) X, then it's a normal risk to lose everything.
amazingandyyy 9y ago
this is how GDAX can be a unicorn!
mrleiter 9y 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 9y 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?
  - shizzlest 9y 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 9y 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 9y 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 9y 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 9y 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

82 points by tstyle 9y ago

nugget 9y 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.

TrainedMonkey 9y ago
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 9y ago
  I'm wondering, do you suppose there is some sort of insurance for these types of eventualities?
  - civilitty 9y ago
    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.
- deleted 9y ago
  [deleted]
DINKDINK 9y 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.

modeless 9y 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?

TrainedMonkey 9y 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 9y 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 9y ago
Also gives them a huge reason to operate as a fractional reserve. This will not end well.
jzwinck 9y 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 9y 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?)

deleted 9y ago

[deleted]

hnaparst 9y ago

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

kev009 9y 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.

deleted 9y ago
[deleted]
shizzlest 9y 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 9y 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.

nodesocket 9y 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?

hnaparst 9y ago
It is probably also illegal for them to compensate some customers and not others. There are FINRA regulations against that.
- nodesocket 9y 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."
  - hnaparst 9y ago
    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.
atomical 9y 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 9y ago
Unless it's an issue with the trading platform itself and they think this is cheaper than a class action lawsuit.
- deleted 9y ago

vii 9y 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

modeless 9y 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.
- vii 9y 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 9y ago

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

danmaz74 9y 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 9y ago
  Losing your entire account is not a normal risk of margin trading. They were way too quick on the margin calls.
  - danmaz74 9y ago
    Depends - if you go long on X and your collateral is all (or mostly) X, then it's a normal risk to lose everything.

amazingandyyy 9y ago

this is how GDAX can be a unicorn!

mrleiter 9y 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 9y 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?
- shizzlest 9y 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 9y 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 9y 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 9y 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 9y 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