Losing the bet at the beginning of August created chaos on the OKEx trading platform, the second largest in the crypto world for volumes traded.
The Asian exchange was forced to liquidate a huge $460 million long position.
This happened after bitcoin fell below $8,000 and made it impossible for traders to manage the coverage of losses which consequently made some profitable users lose 18% of their profits.
OKEx has responded to the controversy by putting in place a plan to avoid further cases of clawback (provided for by regulation) in which traders have to pay for the mistakes of others.
Andy Cheung, Head of Operations of the exchange, spoke about this in an exclusive interview in which he ensures that the group’s risk management practices are able to manage market speculations and avoid any attempts of price manipulation.
The trading system will then be strengthened in an attempt to reduce speculation and minimise any losses.
Although traders knew about the loss-sharing mechanism, the so-called “socialised clawback”, the rather big incident – though not an isolated case – is an example of how things can go wrong in a still unregulated market, especially for those exchanges that allow the purchase of credit contracts.
On the Hong Kong platform, leverage of up to 20 times is possible, which is not even the riskiest formula in circulation.
In the specific case of OKEx, the problem is that the guarantee fund did not have sufficient resources to cover the losses and so the clawback mechanism was triggered. The exchange does not have much room for manoeuvre in this respect.
How are you planning to better manage speculations on your platform in an extremely volatile market?
“We operate an open trading platform for users all over the world. We never give any financial advice and users can trade at their own discretion, even in an extremely volatile market. But we will, always, make our best efforts to prevent any price manipulation attempts”.
“We have a thorough risk management system for futures and margin trading to maintain an orderly market”.
Can you give us more details about the kind of risk management practices and clawback measures OKEx is planning to implement to avoid another liquidation incident like the one happened in early August?
“As announced previously, we have a comprehensive plan of enhancements on our futures trading system. The goal is to reduce the risk of manipulation in the futures market and minimize the possible societal loss as well as any other incidents, and of course, to ensure fairness and objectivity in the market to protect users’ interest”.
a) “We have already deployed the anti-manipulation policy, adopting a scaling margin ratio and applying maximum positions opening limits”;
b) “Mark price will be launched this month. It will be employed to calculate the unrealized profit and loss, margin ratio, and more reference figures. By constructing a reasonable price for the futures market, we can reduce the risks of any deliberate market manipulation”;
c) “Tiered Margin System and Optimized Process of Forced Liquidation will be launched in September. The required maintenance margin will be adjusted according to the user’s positions holding, thus also minimizing the occurrence of socialized clawback”.
d) “We will also implement an Optimization of Insurance Fund Usage in September, limiting the liquidation losses promptly”.
Does your exchange need to keep increasing the insurance fund of BTC in order to reduce profitable traders’ clawback rate? If yes, how much?
The sources of the fund are mainly from OKEx and the premiums after forced liquidations.
The price change for BTC has been in the red for the most part of 2018: are you concerned about the decrease in value of BTC and do you think this trend would impact your business?
“Not at all. I care more about the intrinsic value of Bitcoin. People pay way too much attention on the side factors, such as the recent ETF stories. But it is the idea and the development of Bitcoin that really matters”.
Here at OKEx “we are all digital asset believers, we believe it is the future of currency. Volatility is inevitable. There are always ups and downs in the Bitcoin market, even in traditional investment markets. We are very optimistic about the industry, and we don’t really see any impact on our business”.