OKEx recently had to claw back some bitcoin to avoid losses after a massive $416 million order was filled rapidly.
On July 31, an anonymous Bitcoin trader known only as “ID 2051247” placed orders for Bitcoin futures worth $416 million that offered both cash and leverage. Perhaps foreseeing some trouble, OKEx first asked the trader to reduce the size of the order to reduce risk and, when the trader refused to cooperate, froze the trader’s account to prevent the creation of any more orders.
Frozen Account Suddenly Liquidated
The account was suddenly liquidated as orders were filled by other traders looking for quick profits. Because some orders were effectively backed up by promises rather than cash and the price of Bitcoin began its most recent downward spiral not long afterward, OKEx was faced with an untenable position: Either eat some losses or implement a societal risk management mechanism to claw back some of the bitcoin from counterparties in the trader’s losing bet.
OKEx chose the latter option to regain some of the bitcoin from users who profited from the trader’s massive losing bet. The exchange will recoup a proportional amount of the profits from users who gained from the deal for a total of $9 million in bitcoin. It will also implement policy changes to prevent such a situation from happening again, including a new requirement for traders to make a larger down payment when opening large positions.
Situation Caused by Risky Margin Trading
With the wild swings in Bitcoin price, margin trading can quickly cause both huge gains and huge losses that are mostly limited only by the amount of risk each trader feels comfortable taking on. OKEx, for instance, allows positions to be leveraged up to 20 times. As in the case of the Bitcoin trader whose $416 million trades were suddenly liquidated, this can also cause huge headaches for cryptocurrency exchanges that support futures trading whenever a maker posts an order that is backed up partly by leverage. In this case, the leverage promised amounted to only so much digital smoke.
Clawbacks are basically an attempt at damage control when the exchange and/or the order maker does not have enough cash on hand to pay the takers. Obviously, they aren’t an ideal solution because they can annoy order takers who thought they made out like bandits, and we all know how irritating individuals in the cryptocurrency community can be on social media when they don’t want to let go of a grudge. If there’s a silver lining in this scenario, it’s that the traders who might have gotten fooled by the large trade will be able to keep at least most of their earnings.
While it’s unclear whether OKEx currently has any contact with the trader involved in this case, the trader may be kicking himself or herself for not being able to do anything about the liquidation of those orders due to the frozen account. That trader lost a bet and the ability to trade on OKEx at the same time. It’s probably up for grabs whether OKEx will attempt to use Hong Kong’s court system to extract its losses (though, obligatory Not A Lawyer, but they may have a case if they do).