The 45-Millisecond Ether Flash Crash Prompts Safeguard Effort

  • Coinbase’s GDAX exchange is considering using circuit breakers
  • GDAX might also introduce incentives to lure market makers

Last week’s flash crash in the ethereum digital currency prompted the venue where it happened to consider safeguards used in other markets such as stocks.

Circuit breakers that would pause trading to prevent accidents from spiraling out of control and a system of incentives to lure market makers who’d help keep prices from dropping too far are among the options under consideration, according to Adam White, general manager of Coinbase Inc.’s GDAX market.

Coinbase has consulted with the New York Stock Exchange and other experts on how to prevent flash crashes, White said, though he declined to give details. NYSE Group owns a stake in Coinbase.

The crash at 3:30 p.m. New York time on June 21 drove the currency down to 10 cents from $317.81. The cause, White said, was a single $12.5 million trade -- one of the biggest ever -- placed by a customer as a market order, or a request to sell immediately. That pushed ethereum to $224.48, but the pain didn’t end there. The decline triggered sell orders from traders who’d requested to bail on the currency if prices fell to certain levels, and prompted GDAX to liquidate some margin trades.

It all happened in just 45 milliseconds, White said in an interview. That’s when computer algorithms started buying, driving prices back up to $300 within 10 seconds, he added.

“This was not long, sustained, panicked selling,” White said. “It was a very rapid, cascading event followed by aware and intelligent programmatic traders buying.”

Ether fell 4.8 percent to $288.50 on Friday afternoon, according to data compiled by Coindesk.com.

Stock Lessons

Preventing the next digital currency flash crash might depend on learning lessons from the stock market, where an infamous 2010 rout prompted a series of rule changes to safeguard investors and prevent lightning-fast losses in an increasingly automated trading environment. A system of circuit breakers that briefly halts a stock when it falls too much was put in place, later augmented by a less onerous system that prevents market makers from quoting outside certain price bands.

The stock market still sees sudden losses, such as a mysterious plunge in many large technology shares on June 9, but there’s been no repeat of the 2010 rout.

White said he’s considering bringing more market makers to his venue because last week’s event suggests there weren’t enough buy orders at his exchange to cushion the blow. Market makers aren’t charged to trade on GDAX, said White, and his company is looking at paying them a rebate.

“Although we offer the deepest book, it wasn’t sufficiently deep enough based on that $12.5 million market sell,” he said.

GDAX may also introduce a maximum order size, White said. (Other possibilities were discussed in a company blog post Friday.) Right now, customers who place trades that GDAX thinks will push prices down significantly are warned with a dialog box. The customer who placed the $12.5 million order overrode that message to complete their transaction, White said.

— With assistance by Alexandria Arnold

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