OKEx futures traders will have to absorb losses of 1,200 BTC, after the force-liquidation of a huge position in futures contracts. The exchange intervened at the last moment, injecting 2,500 BTC into its insurance fund, but this could only partially limit the damage.
The story started on Tuesday, when a client, identified by OKEx only by his or her ID number, initiated an unusually large long position order of more than 4.1 million contracts, worth $100 each. The Hong Kong-based exchange says the move triggered its risk management alert system, so it contacted the client, asking him “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,” OKEx explained in a statement on Friday. “Shortly after this preemptive action, unfortunately, the BTC price tumbled, causing the liquidation of the account.”
In such cases, when the loss from a Bitcoin futures contract is too big, the exchange needs to recover those funds, usually through its insurance fund. But if that fund is not enough, like in the current situation, a full account clawback occurs.
The community clawback mechanism used by OKEx envisages taking an 18% cut from the unrealized gains of other users on the platform to recover that expenditure. So, traders who have realized gains on their futures contracts over the past week will be charged the equivalent of $8.8 million at current BTC prices.
“So, if you make say $1,000 on your futures contract but you haven't cashed it out yet, OKEx will take 18% of that to cover their shortfall,” one trader explained.
Over the past few days, the huge futures contract deal, worth more than $400 million, has been rumored on cryptocurrency markets, creating fears among traders.
The volatility of Bitcoin prices makes BTC futures markets very risky. While regulated futures exchanges have a lot of rules (and liquidity) in place, taking (or liquidating) a big position on OKEx can have a significant price impact.
At the peak, the unfilled futures liquidation on the BTC/USDT market was more than 2,300 BTC, quite near the range of the OKEx injection. But the final accounting of the losses saw that even the 2,500 BTC insurance fund was not enough to save traders from the societal clawback.
The large clawback shows that on markets that are not subject to regulation, there are no protections for users, and risk-takers or even bad actors could wreak havoc and cause loss of trust in exchanges.
Meanwhile, OKEx promised to “implement a series of risk management enhancements [...] to prevent any similar cases from occurring again”, starting with an anti-manipulation policy to be released on Saturday.
BTC prices tumbled overnight, down to $7,384 as at 12:40 UTC, losing nearly 8% for the past week.