GDAX to Compensate Customers Who Lost Money in ETH Flash Crash

Ethereum experienced intense volatility last week, leading to its price crashing as low as $0.10 on GDAX. The exchange now says that it intends to compensate customers for whom stop-losses were triggered during the fall.

Reasons for the crash

Ethereum has been one of the star performers in the cryptocurrency space, rising over 40x in 2017. However, network congestion and two ICOs resulted in price volatility last week.

Problems at exchanges also contributed to the uncertainty, resulting in Ether price falling. A large sell order (96,100 ETH) at GDAX resulted in the price slipping from $317.81 to $224.48.

This resulted in stop-loss orders and margin positions getting triggered, resulting in the price slipping momentarily to as low as $0.10.

No market manipulation

The drop in the price of Ethereum shows the effect of large sell orders. Investigations by GDAX reveal no attempt at market manipulation and highlights that liquidity at exchanges is limited.

In the equity markets, there are usually circuit breakers which stop trading after a large movement in price.

Unfortunately, given the inherent volatility in cryptocurrencies, imposing such curbs in these markets is not practical.

GDAX’s position

While all trades were executed correctly during the price volatility last week, GDAX has acknowledged that customers who had stop-losses/margin calls triggered were not happy. Hence it has decided to credit affected customer accounts.

GDAX’s VP Adam White writes in a blog post:

“We will establish a process to credit customer accounts which experienced a margin call or stop loss order executed on the GDAX ETH-USD order book as a direct result of the rapid price movement at 12.30pm PT on June 21, 2017. This process will allow affected customers to restore the value of their ETH-USD account to the equivalent value of their ETH-USD account at the moment prior to the rapid price movement.”

The company plans to credit these customer accounts using its own funds and no other customers will be affected. Lucky customers who were able to buy Ether during the flash crash will be able to keep them, with GDAX honoring these trades.

Moral hazard?

The action of GDAX in crediting customer accounts may help it retain its customers, but it does give rise to the question of whether there is a moral hazard in doing so. The flash crash was caused not by any exchange malfunction, but by a large sell order.

Compensating customers who lost money during market volatility may lead to others being lax with placing stop-loss orders. Investors have to be cognizant of the risks they face while dealing with volatile assets like cryptocurrencies.

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