OKEx Issues Forced Liquidation Incident Update by Injecting 2500 BTC in Futures Market
OKEx $460 Million Liquidation Happening Within Hours
OKEx, a Hong Kong-based cryptocurrency exchange may be in some trouble as a result of a trade. The exchange recently processed a USD/BTC futures contract, worth about $460 million. At the time of the trade, the price of bitcoin decreased and as a result, the exchange tried to liquidate the position.
Unfortunately, the contract’s size makes liquidation impossible. If anything, the exchange was only able to liquidate the trade and now, the exchange is looking at a prospect of a $420 million unfilled position.
If you want to read our original post, we suggest you do this first then comb through the rest of this post after getting a brain dump of the current storyline here:
@OKEx_ You currently have a 400million dollar liquidation, half of OKEX BTC quarterly open interest, could you make a statement how you are about to handle that come Friday because that is a socialized loss of 50% if market drops from here. #bitcoin @OKCoin @BitMEXdotcom
— ibankbitcoins (@ibankbitcoins) July 31, 2018
If bitcoin’s price fails to increase from its current level, then it is likely that OKEx’s system will experience a loss of 950 BTC, which is about $7.2 million. The good news is that the exchange does not leverage future contracts for its traders. This is different from FX brokers, which tends to internalize its trades. Here, traders are required to provide one another with leverage and liquidity.
Unfilled liquidation on OKex is now at -2337 BTC.
Settlement hours away.
— Whalepool (@whalepool) August 2, 2018
The trouble with this loss is that the sum is too large for the traders to cover their losses, especially in light of OKEx’s socialized trading model.
Further, OKEx features a “clawback model,” which means that when a trader’s margin balance reaches zero, the exchange will make a concurrent limit order at the current exchange rate. In the event that the order remains unfilled by the time of settlement, profitable traders must cover the cost, which are likely traders on short contracts.
Although the platform’s insurance fund may be able to cover the loss, the fund only features 10 BTC, about $75,700. This leaves another 940 BTC for traders to compensate for. According to Lennix Lai, the platform’s spokesman, the firm expects to implement serious clawback measures. At this point, the firm’s future prospects are not looking too well due to this trade.
OKEx Liquidation Rumors Regarding BitMex
Leave it to crypto community to speculate and ponder about what could possibly have caused this situation and in one high profile telegram group this is what they came up with:
They expect to see ‘hyper volatility' with the bitcoin price in the coming hours.
With this $460 million long liquidation pending on OKEx, which comes to a head at 16:00 Hong Kong time, the Bitcoin price needs to climb back over $8,030 range or so to clear and cover the order. But now the rumors are swirling as to who the elephant is and the crypto community has a plot mapped out – its Bitmex – an in underhanded attempt to screw over the OKEx crypto exchange and siphon their client base as this will have a dramatic effect on current OKEx traders. Knowing that Friday, being the end of the week, usually has a lower trading volume as the week goes on. Then, if the price does not see the necessary spike happen, the exchange has a socialized loss clawback system which more or less means the traders that were in net profits will see a clawback rate and automatically deducted from their profits. Alot to swallow so far right?
But what this could mean is the that the exchange is spoofing buy orders to get the price moving upward. Of course all of this is pure speculation until the event actually happens just hours from now – but it is something to keep an eye on as a price drop lower would become extremely expensive for profitable traders on OKEx who would thus be targeted by the clawback system to mitigate the loss created by the $460 liquidation.
What do you guys think of the “Bitmex undermining OKEx” ploy to steal users and boost their own exchange?
Crypto Twitter Social Media Reactions
Bitmex has an insurance fund of 10k BTC while OKEX has 10 btc in their fund, good luck to OKEX future traders trying to cover that $460m liquidation this week
— Foz (@fozcrypto) August 1, 2018
There seems to be a bunch of uncertainty in the market right now, especially with the OKEX announcement in less than 5 hours. I'm hearing lots of talk of possible flash crashes. Please play it safe you guys, especially if you're using leverage. Nobody knows which way we're going.
— TraderKoz (@TraderKoz) August 3, 2018
Is OKex the Mt Gox of 2018?
— Coyote (@CryptoCoyote) August 3, 2018
— ๑ PANDA ๑ (@PandaofBinance) August 3, 2018
OKEX announcement creates the catalyst for the new bull run.
FUD turned FOMO @ 4am est time . Stay tuned.
Don’t liquidate me please …..
— Sephiroth (@Sephir_ETH) August 3, 2018
Another member inside a crypto group said this possible scenario could play out and get executed to reduce market risks caused by this incident. They said if OKEx dumped an extra 2,500 BTC from their own capital pool stash into the insurance fund, when the settlement happens at end of day 4pm HKT time on August 3, 2018 – that if any malicious manipulation attempts are found that it will delay the settlement process for 10 minutes and can then manually adjust the price back to a reasonable level before delivery is completed. Of course this account would be suspended immediately because of the malicious attempt but would seem to help de-risk the situation that is unfolding.
OKEx Update on Forced Liquidation Incident
OKEx Maintains Order in the Futures Market by Injecting 2500 BTChttps://t.co/TQUS9MoRPb
— OKEx (@OKEx) August 3, 2018
An enormous long position in BTC0928 futures contract was force-liquidated at 20:17:14 July 31, 2018 (Hong Kong Time, UTC+8). Due to the sheer size of the order, our risk management system may be triggered to activate the societal loss risk management mechanism.
The message continues:
OKEx has adopted the societal loss risk management mechanism since launched and it has been working orderly as intended. When the insurance fund cannot cover the total margin call losses, a full account clawback 1 occurs. In such case, only users who have a net profit across all three contracts for that week will be subject to the clawback. We will take a portion of the profit in equal percentage from all profited traders only to cover the difference between the liquidated price and settled price.
For more clarity:
For example, user A and B place 1 BTC each as the margin for opening positions. Assuming the price of BTC is USD1, then each contract costs USD1 as well. At this price, user A longs 10 contracts with 10x leverage, and user B shorts 10 contracts with 10x leverage. If now the spot index price drops from USD1 to USD0.1, user B should gain USD9 and user A should lose USD9 from this trade. However, the margin from user A for this order is 1 BTC, which worths USD 1 only. So the actual gain for user B will also be 1 BTC only, the remaining 8 BTC will be socialized instead.
In order to prevent socialized clawbacks from occuring, we have been working really hard to optimize our risk management system, such as launching price limit rules, early forced liquidation system, forced liquidation order price adjustment and more. There have been malicious rumors accusing us of manipulating the forced liquidation system. We hereby would like to point out the fact that, most of the similar price movements in the market are caused by forced liquidation orders.
The client with user ID 2051247 initiated an unusually large long position order (4168515 contracts) at 2am on July 31 (HKT) and triggered our risk management alert system. Our risk management team immediately contacted the client, requesting the client several times to partially close the positions to reduce the overall market risks. However, the client refused to cooperate, which lead to our decision of freezing the client’s account to prevent further positions increasing 2. Shortly after this preemptive action, unfortunately, the BTC price tumbled, causing the liquidation of the account.
We could go on and on (and we will in the next post once the dust settles) but what do you guys think about this developing story? Will it have a huge effect on the price of bitcoin and the cryptocurrency markets at large? One thing you can bet on aside from getting the popcorn.gif ready, crypto twitter will keep us in the loop as well as your favorite bitcoin price charts.