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RE: Anyone else notice the Bitcoin Cash 'flash crash' on Bitfinex? Regulators will.
What's the downside of having the flash crash? As far as I can tell, it only hurts people who use trading bots and set them up a certain way. Seems like just a natural consequence of using bots and nothing that really needs to be or even could be corrected, other than just people changing the way their bots trade.
Maybe the worry is that the exchange can manipulate the crash (and then buy themselves at the cheap price), but I don't really see how 'regulation' would fix this. It would just mean people with the government's permission can now manipulate the crash.
Seems like using bots in a way that doesn't leave you vulnerable to such things is the only solution.
A lot of people that trade manually (not with bots) put in stop losses,. They do this to protect themselves should the price fall below a certain threshold. These seem to get automatically triggered when these flash crash occur on crypto exchanges.
Worse still if you say you put in a stop loss $300. During ordinary trading you can expect, should it get triggered to execute a trade in the $295 - $300 range (depending on the liquidity and size of the order).
However during a flash crash, by the time your order gets executed you could end up selling your coins at $50 (or in the case of the GDAX incident 50 cents). Which would not be your intention. Particularly if the price goes back up to normal range say $350 minutes later. People lose a lot of money on an isolated occurrence that happens on a single exchange that is out-of-step with the rest of the exchanges.
Someone with leveraged cash and visibility of stop losses could use that money and information to crash the market and pick up cheap coins as the stop losses are executed, if the exchanges do not have the necessary safeguards in place.
Add to that, that the exchange has visibility of everybody's stop losses and it is largely unregulated space.... it's an open invitation for consumer protection regulators to stick their noses in.
A very informed answer!
From a purely technical background, that 'flash crashes' can happen makes sense. The trading engine has no concept of particular tokens, what their intrinsic value is, what their prices on other exchanges are or whatever, it can only look at the available orders in the orderbook and if there isn't enough liquidity then a flash crash may happen.
Sure we can argue there should be protections to stop liquidating people if the market drops by a certain percentage in a single second or whatever, but that's where we get to choose arbitrary numbers - always difficult. Adding delays could also be risky: let's imagine the market doesn't pick back up and drops even more, now margin traders can't pay back their loans anymore.
Something I've been wondering is, should the engine draw on liquidity from other base pairs? For example, if ETH/BTC is catastrophically crashing, should margin positions be liquidated by drawing from orders on ETH/USD pair then selling the USD for BTC? This has both an upside and downside - it might make crashes less frequent (more liquidity to draw from), but could also cause a 'cascade' of crashes across multiple currency pairs (ouch!).
Whole topic is difficult, every exchange will need to find their own answer. But as more liquidity enters the markets, flash crashes will become less frequent.
Sorry for the rant, I should probably have posted this as a new blog post haha.
From what I've been told, Poloniex's margin trading engine has a 'protection' like that in place. A while ago we saw ETH/BTC on Polo crash by 20% in an instant but then trading froze for several minutes as (presumably) an engineer there was fixing things and trying to prevent it from crashing further... pretty intriguing haha :)
This guy is the best.
Nanzo for Un-President.
Not the UN President either lol!