cryptocurrency: How crypto exchanges could stop flash crashes if they wanted to

Cryptocurrency businesses should learn a lot about crash prevention.

A strikingly false dive is not unusual in cryptocurrencies. In June 2017, Ether had a shocking 45 milliseconds that brought its price down to 30 cents – a loss of 99.9%. This week, it was Bitcoin’s turn in a rapid crash: the largest cryptocurrency pigeon reached $8,200 in one minute Thursday from around $65,000 on the US Binance exchange after an institutional trader’s algorithm encountered an error and caused the price to crash.

Stock investors are known to have experienced their own terrifying moments – Black Monday in October 1987 and the infamous flash crash in May 2010. Because such incidents threaten the credibility of trading, US regulators have installed protective barriers. With cryptocurrency becoming increasingly popular, digital asset exchanges may have to think similarly.


“I think our market structure will look a lot like the traditional market structure over time,” Dave Abner, global head of business development for cryptocurrency exchange Gemini, said on the latest episode of Bloomberg’s “What Goes Up” podcast. The rapid crash in 2010 drew attention to what is happening here in a world where algorithm trading.

Useful stock history. The more than 20% defeat in 1987 frightened everyone so much that soon-to-be Treasury Secretary Nicholas Brady delved into his past to find a solution. At an old building party he encounters circuit breakers, which prevent electronic devices from browning due to power overload. When US President Ronald Reagan asked to prevent the disaster from repeating, the group led by Brady brought in circuit breakers for stocks – stopping the entire market when prices fell too low, giving traders a chance to cool off and re-evaluate matters.

Moving on to May 2010 and US stocks fell back on a path that briefly wiped out $1 trillion in value. The inexplicable regression – which stunned the entire industry – was massive but not significant enough to power circuit breakers across the market. Regulators’ reforms included preventing algae from moving stocks too quickly outside established price ranges.

Since then, flash crashes have basically gone out of stock and no one is worried about them. But in the crypto space, where similar guarantees can be offered, perhaps the lack of a strong supervisor at the heart of the industry is slowing things down.

They are commas
Stocks are highly regulated, so it was relatively easy to enforce protective measures. But in the libertarian-leaning world of cryptocurrency, the spirit is closer to: If you get it wrong, that’s your problem. For anyone who sold $8,200 bitcoin on this week’s crash, these are the breaks. For the people they sold to, this was the deal of the year.

This may be shortsighted.

Jim Greco, Managing Director of Radkl, a cryptocurrency exchange backed by billionaire Steve Cohen and high-frequency trader GTS, said.

Not only does the wrong dip hurt the seller, Greco added. “It’s not just about this guy – well, he got screwed up because he sold more bitcoins than he wanted. There are also a bunch of derivatives based on spot price, and they get filtered out of bad prints like that.”

Greco has spent years thinking about these things. He was a software developer and then a price trader at Getco, one of the first high-frequency trading firms, and then built a now closed exchange to trade US Treasuries. In both companies, his job was centered around the plumbing market. In his view, the price ranges that have been in US stocks for about a decade make sense. Each stock is prevented from moving up or down by a certain percentage during a specified period of time. The goal is to prevent individual deals from getting done at crazy prices.

Even exchanges
It’s also worth considering “finger checks,” which try to detect instances where merchants — or their algae — mess numbers up in an order, such as adding a zero or two to numbers that represent the size of a deal, Greco said.

“It should be carried out on the basis of a trade-in,” Greco said. “There is no central governing authority.”

Trading rules published on the Binance.US and Coinbase Global Inc websites. , two of the largest exchanges, is clear: They have no circuit breakers or price ranges. They even use exactly the same words, saying that their exchanges “do not use circuit breakers or automated trading stops based on predetermined price ranges.”

Coinbase has played with circuit breakers. An executive said during a 2017 interview in the aftermath of Ether’s crash that he was considering it after speaking to the New York Stock Exchange and other experts.

As for Binance.US, a Binance.US spokesperson said in a statement that “in line with the current structure of circuit breakers and trading halts, Binance.US does not cancel open orders or block orders away from the market.” However, “if we identify prohibited business practices, we may modify, suspend or terminate account activities pending further review.”

Regarding the flaw on Thursday, a Binance.US spokesperson said: “We have identified the issue, alerted the relevant institutional trader and worked with the trader to quickly resolve the issue.” “We are vigilant and do everything in our power to ensure that trading on Binance.US is fair and orderly.”

Brett Harrison, president of FTX.US, another major crypto exchange, said regulators are considering such things. They are questioning whether the markets “have all the safeguards in place that allow for orderly execution that prevents micro-flash crashes like the one we’ve seen, and those are great questions,” he said a day after the bitcoin crash on Bloomberg’s “QuickTake” stock-streaming program. .

At FTX.US, “We put in a lot of different rules, circuit breakers, and limits that are required for us to make sure that we can operate the exchange in an orderly manner,” he said. “But these are not required by the federal regulator,” he added. “We need to set good rules for cryptocurrency exchanges in this industry and be able to provide the same types of collateral as existing stock and futures exchanges.”

current pressure?
Maybe natural selection sorts this out. If the exchanges continue to have problems and take care of the traders, the volume will shift to those that have guarantees.

“As they attract more institutional money into this asset class, those institutions will ask for some kind of protection against errors like this,” Greco said. “So that’s probably where the pressure is coming from.”

The trade or deals that flooded Bitcoin on Thursday were significant. More than 592 bitcoins were traded at the moment of the crash, worth nearly $40 million at pre- and post-crash prices. The order that Ether crashed in 2017, at the time anyway, was one of the biggest orders ever on Coinbase.

“Making circuit breakers a part of the contracting landscape makes it more difficult for some market participants… to mislead themselves into believing that it is possible to sell huge quantities in short periods of time,” according to a 1988 report by the Brady team.

In today’s era of ultra-fast trading where a millionth of a second issue has been written, another thing the Brady Group wrote more than three decades ago resonates: Circuit breakers “facilitate price discovery by providing ‘leeway’ to stop, assess, prevent panic, and advertise about system anomalies to attract value traders to mitigate violent movements in the market.”