Flashy and flawed dives are not unusual in cryptocurrencies. In June 2017, Ether It took a heartbreaking 45 milliseconds that brought its price down to 30 cents, a 99.9% loss. This week, it was Bitcoin's turn of the sudden drop - the largest cryptocurrency plunged to $ 8,200 in a single minute on Thursday from around $ 65,000 in BinanceUS exchange after a businessmanThe 'algorithm detected an error and lowered the price.
Investors in stocks have suffered their own scary moments: Black Monday in October 1987 and the infamous crash of May 2010. Because such incidents threaten the credibility of trading, US regulators installed safety measures. As crypto becomes more and more mainstream, digital asset exchanges may have to think similarly.
"I think our market structure will become much more like the traditional market structure over time," said Dave Abner, global head of business development at the Gemini crypto exchange, on the latest episode of the podcast "What Goes Up" from Bloomberg. The sudden crash of 2010 "really drew attention to what's going on here in a world with algorithm trading."
The history of actions is instructive. The defeat of more than 20% in 1987 so scared everyone that future Secretary of the Treasury, Nicholas Brady, delved deep into his past to find a solution. In an old construction gig, he had come across circuit breakers, which prevent electronic devices from burning out from a power surge. When asked by US President Ronald Reagan to prevent a repeat of the disaster, the group Brady led brought circuit breakers to stocks, stopping the entire market when prices drop too low, giving traders a chance. to calm down and re-evaluate things.
Fast forward to May 2010, American stocks went wild again in defeat that briefly erased a trillion dollars in value. The inexplicable decline, which scared the entire industry, was huge, but not big enough to trigger circuit breakers across the market. Regulators' fixes included preventing algorithms from moving stocks too quickly outside of established price bands.
Since then, sudden crashes have basically disappeared from the stock and no one really cares about them. But in the crypto realm, where similar safeguards could be introduced, the lack of a strong supervisor at the core of the industry likely slows things down.
They are the breaks
Stocks are highly regulated, so it has been relatively easy to impose protections. But in the world of libertarian-leaning crypto, the spirit is closer to: if you're wrong, that's your problem. For anyone who sold Bitcoin at $ 8,200 in this week's crash, those are the breaks. For the people they sold to, it was the deal of the year.
That is potentially myopic.
"Crypto exchanges should implement these types of protections because ultimately they will protect not just the market as a whole, but their customers," said Jim Greco, managing director of Radkl, a crypto-backed crypto trading company. billionaire Steve Cohen. and the high-frequency trader GTS.
The wrong dives don't just hurt the seller, Greco added. โIt's not just that guy, well, he screwed up because he sold more Bitcoin than he wanted. There are also a lot of derivatives based on the spot price, and they settle on bad impressions like that. "
Greco has been thinking about these things for years. He was a software developer and then a rate trader at Getco, one of the first high-frequency trading firms, then built a now-closed exchange to trade US Treasuries. At both companies, his work revolved around the plumbing from the market. In his opinion, the price bands that have been in place in US stocks for about a decade make sense. Each share is prevented from rising or falling by a certain percentage within a set period of time. The point is to prevent individual trades from being carried out at outrageous prices.
Until exchanges
Also worth considering are "thumb checks", which attempt to detect cases where traders, or their algorithms, screw up the numbers in an order, such as adding a zero or two to the digits representing the size of a trade. Greco said. .
"Trade-by-trade would have to be implemented," Greco said. "There is no central government authority."
The trading rules posted on the Binance.US and Coinbase Global Inc. websites, two of the largest exchanges, are explicit: they have no circuit breakers or price bands. They even use the exact same words, saying that their exchanges "do not use automatic switches or automatic interruptions of operations based on predetermined price bands."
Coinbase has played with circuit breakers. One executive said during a 2017 interview after Ether's crash that he was considering them after speaking with the New York Stock Exchange and other experts.
Regarding Binance.US, a spokesperson said in a statement that "in line with the current structure of circuit breakers and trade stops, Binance.US does not cancel open orders or avoid out-of-market orders." That said, "if we identify prohibited business practices, we may modify, suspend or terminate account activities pending further review."
Regarding Thursday's failure, "We identified the issue, alerted the institutional merchant in question, and worked with the merchant to quickly resolve the issue," the Binance.US spokesperson said. "We are vigilant and do our best to ensure that trading on Binance.US is fair and orderly."
Regulators are thinking about those things, said Brett Harrison, president of FTX.US, which is another major crypto exchange. They wonder if the markets "have all the safeguards that allow for orderly execution that prevents against mini flash shocks like the one we saw, and those are big questions," he said a day after the Bitcoin crash on Bloomberg's "QuickTake." Stock โbroadcast program.
At FTX.US, "we implement a lot of the rules and the circuit breakers and the different limits required to make sure we can run the exchange in an orderly manner," he said. "But those are not required by the federal regulator," he added. โWe need to establish good rules for cryptocurrency exchanges exist in this industry and be able to provide similar types of safeguards that existing stock exchanges and futures exchanges provide. "
Main stream pressure?
Perhaps natural selection will solve all this. If exchanges continue to struggle and traders worry, the volume will shift towards those with safeguards.
"As you attract more institutional money to this asset class, those institutions are going to demand some kind of protection against mistakes like this," Greco said. "So maybe that's where the pressure ends up coming from."
The trade or exchanges that sank Bitcoin on Thursday were big. More than 592 Bitcoins were traded in the minute of the crash, worth nearly $ 40 million at pre-crash and post-crash prices. The order that crashed Ether in 2017 was, at least at the time, one of the largest on Coinbase.
"Making circuit breakers part of the contractual landscape makes it much more difficult for some market participants ... to delude themselves into believing that it is possible to sell large quantities in short periods of time," according to the report that the Brady's team published in 1988.
In today's era of hyperfast trading, where millionths of a second matter, something else the Brady group wrote more than three decades ago resonates: Circuit breakers โmake price discovery easier by providing a 'wait time' to pause. , assess, inhibit panic and publicize order imbalances to attract value traders and dampen violent movements in the market. "
