OKEX released this statement on August 3rd explaining that a very large trade occurred, that it had losses that surpassed the exchanges’ obligation to support, so they are enacting “the societal loss risk management mechanism“.
These are NOT linked to or related in any way, to the futures contracts that trade on the CME or CBOE. Not every article I have read makes this clear. So the bright side of this story is that the contracts listed and traded on U.S. exchanges were not involved. That is encouraging from both a regulatory aspect and for the future potential growth of cryptocurrency linked products in the U.S.
If anything, the problem seems to start with incredibly lax risk management at this exchange. According to the OKEX statement, the risk management team ‘immediately’ contacted the client to reduce the size of the trade – begging the question – how did their risk management system allow the trade to occur in the first place? On the bright side, something like that should be easy to fix, but it is indicative, potentially of how many simple things are being overlooked in the rush to make money from crypto trading.
I have worked with the CME in the past on product development (specifically CDS futures) and from my experience, they would not have missed anything this simple. In fact, while I am not a huge fan of the concept of Bitcoin futures, as currently implemented, I do not expect any errors in the operation of the CME or CBOE futures contract. I am sure that regulators will be questioning them on the back of the OKEX, as they should, and I am also quite positive the exchanges here will pass with flying colors.
The biggest lesson here is to do you diligence when making your Bitcoin or other crypto bets. The volatility surrounding crypto makes it hard enough to trade, let alone having to take into tail risk, like ‘societal loss’. If anything, this should drive business to the best regulated and largest exchanges.
Having said that, Bitcoin price action remains fraught with wild and inexplicable gaps, like a $400 drop and rise in an hour in the late hours of July 30th (according to Bloomberg). This particular trade, and unwind seems to have affected Bitcoin pricing globally and likely impacted trading of the U.S. listed contracts as well. Volumes and open interest seemed to have increased around the time of this large trade unwind. It could be a coincidence, though I suspect that some smart traders, aware of the situation, put short trades on in these future contracts to take advantage of the forced unwind.
Futures prices have not recovered yet, which is interesting, given that away from this story, there were several positive events for the industry that are generating a lot of buzz, but so far aren’t helping price. I will delve into those positive developments tomorrow.
The bottom line is that this should not derail Bitcoin futures, it might even help the best regulated ones gain market share, but it will attract more regulatory scrutiny.