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Margin trading<\/h3>\n
Margin trading<\/a> is when you borrow to multiply the effect of your trading \u2014 so rather than just having $100 to trade with, you can borrow and trade with $200, using the $100 as collateral. If your trade pays off, you\u2019ve done really well!<\/p>\n If your trade doesn\u2019t<\/em> pay off\u00a0\u2014 or even if the price dips enough that it looks like it won\u2019t pay off\u00a0\u2014 the lender forces you to liquidate the whole position and pay them back immediately, and you lose your collateral.<\/p>\n Crypto prices are ridiculously<\/em> volatile. Volatility attracts traders, but anyone who trades cryptos on margin is exceedingly foolish \u2014 you’ll get margin-called remarkably often.<\/a><\/p>\n But margin trading on cryptos is incredibly popular\u00a0\u2014 because too often, there’s only a fine line between “crypto trader” and “gambling addict.”<\/p>\n OKEx offers its own futures contracts<\/a> on the price of Bitcoin. These are in units of USD$100, but are settled by delivery of the bitcoins to the trader’s OKEx account. The contracts run weekly, closing 16:00 Hong Kong local time (HKT) every Friday. Margin is 10\u00d7 or 20\u00d7.<\/p>\n (These are completely unrelated to the CME<\/a> or CBOE<\/a> Bitcoin futures \u2014 which are run in a much more orderly fashion, with maximum leverage around 2\u00d7.)<\/p>\n At settlement time, the losers supply the profits of the winners. If the losers don’t have enough funds, someone gets short-changed.<\/p>\n When a trader’s margin gets called, the exchange submits a market order at the price they blew their margin at. If that order isn’t filled before the futures contract expires … the exchange takes a loss.<\/p>\n Fortunately, OKEx has a mechanism<\/a> to deal with that \u2014 they have an “insurance fund,” supported by “the premiums after forced liquidations,” and contributions directly from OKEx’s own funds.<\/p>\n If that’s not sufficient \u2014 they take the money from traders whose trades didn’t<\/em> go bad! They call this “societal loss”:<\/a><\/p>\n OKEX Futures uses a “full account clawback” system to calculate the clawback rate. The system’s margin call losses from all three contracts will merged and clawbacks will be calculated according to each user’s entire account profit, instead of calculating each contract’s margin call loss and clawback separately. Only users that have a net profit across all three contracts for that week will be subject to clawbacks. Clawbacks will only occur if the insurance fund does not have enough funds to cover the system’s total margin call losses.<\/p><\/blockquote>\n This is an unusual system, not found outside crypto trading. OKEx requires customers to pass a test on their terms of service<\/a> before they can trade futures.<\/p>\n This socialisation of losses allows the exchange to offer ridiculous levels of margin at little risk to themselves \u2014 which attracts more traders and trades, and thus more trading fees.<\/p>\n Per OKEx’s incident report<\/a> (archive<\/a>), an unknown trader placed a huge<\/em> order of USD$416,851,500 \u2014 that’s nearly half a billion dollars<\/em> \u2014 at 02:00 HKT, 31 July (18:00 UTC, 30 July). This was a “long” position, meaning they bet the price would go up.<\/p>\n OKEx’s risk management alerting system flagged the order, due to its size \u2014 but didn’t automatically block it. Instead, their risk management team contacted the client, asking them “several times” to reduce the size of the position.<\/p>\n The customer refused, so their account was frozen to prevent further increases \u2014 but the position was not removed.<\/p>\n The Bitcoin price went down over the course of the day, from approximately $8020 to $7750. OKEx forced the liquidation of the position at 20:17:14 HKT (12:17:14 UTC) on 31 July.<\/p>\n The spectacle of the rich guy getting wrecked caused gales of schadenfreude-filled laughter<\/a> from their fellow traders.<\/p>\n Unfortunately, the trade had gone badly enough that the trader’s losses were greater than their collateral. The unfilled long liquidation resulted in an open loss of about 950 BTC.<\/a><\/p>\n The “societal loss” clawback mechanism has been triggered previously<\/a>\u00a0\u2014 but this seems to be OKEx’s biggest clawback yet.<\/p>\n <\/p>\n The massive unfilled Long liquidation of $415 Million has an open loss of -950 BTC that will hurt profitable BTCUSD contract traders of all maturities on @OKEx_ Futures<\/p>\n Social loss clawback may end up being biggest in the history of @OKCoin<\/a> , will @starokcoin<\/a> intervene? pic.twitter.com\/6tnmmSA0vB<\/a><\/p>\n — Whalepool (@whalepool) July 31, 2018<\/a><\/p><\/blockquote>\nHow OKEx futures work<\/h3>\n
Timeline of events<\/h3>\n
Socialising the losses<\/h3>\n
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