Statement on Extraordinary Trading Incidents on Liquid

Crypto markets are well known for their volatility and unpredictability. That’s part of the appeal for many traders. Also prone to unpredictability are traders themselves. As a cryptocurrency exchange, we do our best to ensure that the actions of any one trader (either intentional or as a result of a mistake) cannot have an adverse impact on other traders.

However, on rare occasions, events transpire that end up impacting a number of other traders. Such incidents include what are sometimes known as “flash crashes” (when the price of an asset temporarily falls well below the current trading price before returning to normal) or “spikes” (when the price of an asset temporarily rises well above the current trading price before returning to normal).

These incidents are rare but they do occur on occasion on most cryptocurrency exchanges. Often they are the result of a large limit order placed well outside of the current trading range or a large market order that fills a significant portion of the buy or sell bids in an order book. This can be intentional, but it is sometimes done accidentally by a trader (the dreaded “fat finger”).

We’d like to address a small number of such incidents in this message to clarify our position and answer a number of questions we’ve received from our community.

Firstly, for background, the incidents we will address today are:

• November 16 2018: Between 2-3am JST of the price of XRP on Liquid rose briefly to about 10 USD.
• April 22: At 7am JST on April 22 the price of ETH dropped briefly to about 10,028 JPY (about 90 USD).
• April 26: Between 12.55pm and 5.30pm JST the price of ETH dropped briefly to about 4,987 JPY (about 35 USD).
• April 26: At 2:12pm JST the price of ETH on ETHSGD briefly rose to about 850 SGD.

How do we protect users from the impact of such incidents?

On Liquid we utilize what are known as “circuit breakers”, which monitor every trading pair for extraordinary price movements. If an asset’s price moves a significant percentage in either direction within a 15 minute timeframe a circuit breaker triggers temporarily halting trading for the affected market until it is manually restarted.

The circuit breaker exists to prevent manipulation and to mitigate the impact on other traders on Liquid. All of the aforementioned incidents triggered circuit breakers as intended, halting trading in those particular markets.

What circuit breakers cannot do, however, is halt the execution of a single order. When an individual places a very large limit order far from market price, or a very large market order, the circuit breaker will only catch the price change after the order is executed in its entirety.

Only if there are no orders in the orderbook that meet the criteria of the order would the order be prevented from being entirely filled. This is why it may appear that a circuit breaker is triggering at different deviations from the current market price, especially if the price movement is a result of a particularly large market order.

What caused the incidents in question?

Trading markets are open for users to make their own decisions. While we control the mechanisms behind the markets, we cannot control the trading choices of our users.

As we have explained, if a trader places a very large market order or a limit order that is far from the prevailing market price it will execute a large amount of waiting limit orders in the order book. The circuit breaker will catch large movements and allow us to reach a verdict on the situation after the fact.

This is what happened in the aforementioned incidents. For example, on November 16, a customer placed an exceedingly large buy order for XRP at market price using 25x leverage. This order caused the price of XRP to reach around 10 USD for a brief moment. The system acted as intended and designed, triggering a circuit breaker and halting trading of XRP/USD. As with all markets (crypto, securities, forex) there is no guarantee of the price an order will fill when using market orders, especially ones that are so large.

Similarly on April 22, one user’s very large ETH margin position was mostly liquidated after a margin call check, again, with the system functioning as intended. The liquidation caused the price of ETH to fall, once more triggering a circuit breaker and halting trading.

What is the impact on traders and actions taken by us as a result of such events?

If a circuit breaker does trigger, traders are temporarily prevented from trading while we conduct due diligence regarding the cause of the price movement. On markets that are limited to spot trading, there may be some disruption to normal trading activities while waiting for a market to be reenabled.

However, on markets where we offer margin trading, a large movement in one direction can trigger stop loss orders, take profits or liquidate a user’s position.

What actions does Liquid take after such events?

It’s in our interest to protect our customers on Liquid. Any time an incident occurs on Liquid, we thoroughly investigate the cause and look for ways we can make improvements to our system controls. Not all incidents can be easily anticipated or automatically prevented, especially when factoring in unusual actions taken by traders.

However, as a result of these incidents, we are building a series of pre-trade risk controls that will reduce the probability that such events can occur. This will prevent limit orders from being too far on the wrong side of the prevailing market price.

For market orders, we are developing a control that will evaluate the size of a market order in comparison to previous executed orders to prevent orders that will have adverse market effects. This is in the interest of the trader placing the order, as well as all other traders on the platform.

These controls will better equip our system to protect against market abuse as a result of intentional or accidental actions by traders.

Will Liquid reverse trades after such incidents?

Only in extremely rare, exceptional circumstances, and only after meticulously careful consideration, would we entertain the idea of reversing trades or issuing refunds, and only then on a case-by-case basis.

In the incidents in question, as the system functioned as intended and as designed, we will not be reverting trades or issuing refunds in these cases. We appreciate that this decision may not be the decision desired by the small number of traders whose positions were liquidated as a result of these incidents. However, as there were no system glitches or errors, we must maintain the integrity of our platform and let the trades in question stand.

For those traders who incurred liquidation fees that left their balance negative, we will as a goodwill gesture, and on a without responsibility basis, forgive those fees and return the balances in question to zero. We will reach out to all affected users.

We will be sending an email to any users who we have identified as being affected by these incidents to explain our position and direct them towards this statement for their reference.

For any traders who have been impacted by the incidents mentioned above who would like to further discuss the matter, we would like to open up a line of communication to our team. Please email our Head of Customer Service Jason Gunn at jason.gunn@liquid.com using the subject header “RE: Trading incidents on Liquid” with any questions, comments, concerns or feedback you have, and we will respond in a timely manner.