When a trader sold a large position in the digital currency Ethereum last Wednesday, the sale triggered a so-called “flash crash” on the Coinbase-owned exchange GDAX—causing the price to tumble temporarily from around $320 to just 10 cents. The price quickly recovered, but not before some traders, who had set up automated “sell” orders in the event of a price decline, got walloped.
Coinbase initially responded to the flash crash by saying “tough luck” to these traders, whose Ethereum had been sold off at fire sale prices to meet margin calls and so-called stop-loss orders.
But late Friday, the company reversed its position. The VP of GDAX, Adam White, said in a blog post the exchange would make the flash crash losses:
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.
White added that it would fund the customer credits with company money, and that it would not unwind the trades of those who had placed “buy” orders during the flash crash. This is terrific news for those who bought Ethereum during this period—it means some fortunate traders snapped up the digital currency—which is trading at $305 as of Monday morning—at a massive discount.
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The move by GDAX appears to be aimed at preserving goodwill among its customers, and reassuring traders that they can place stop loss orders and trade on margin without fears of a future flash crash.
Flash crashes can occur when a large trade causes a price decline that in turn causes a series of automated “sell” orders to kick in, which in turn leads to a cascade of plummeting prices. The most famous flash crash occurred in 2010 when automated trading related to ETFs caused major indexes to tumble, and shares in major companies to briefly trade for pennies. (The exchanges unwound most of those trades).
Many people on social media applauded Coinbase’s decision to make good the traders’ flash crash losses, though some complained the move amounted to a bailout and set an unhealthy precedent.