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Comment by weavie | Hacker News Reader

I guess the price slumped faster than the exchange could liquidate his position. It makes you wonder what an exchange was thinking letting someone build up a $0.5 billion position on margin.. Surely that's just very poor risk management on behalf of the exchange?

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Pretty much. The liquidation "insurance" fund was only 10 btc. On BitMEX (the other big high leverage bucket shop) it's 10k btc.

My favorite part of the story is that they reached out to the trader and asked him to reduce his position and he was just like "nuh uh . . . dies".

"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."

shrug You don't have to care what your user's margin positions are if you don't have any intention of paying out on them if they're large enough, or you can manipulate the local orderbook to stop them out.

I cannot imagine letting such insanity happen.

You allow shorts on your exchange, but you dont have controls in-place?

My gosh, have some php email() when >1M in shorts is happening. Send it to a CEOs personal email, or something... (let alone have functions in place to force a realization)

I really am having a hard time understanding how this happened.

A bunch of people thought they were smarter than every bank and stock exchange out there. That's how this happened.

How could an exchange allow long futures without allowing short futures?

They do require them to math. So this trader’s losses were other traders’ gains. However, when the mark-to-market losses exceeded the loser’s ability to pay up, then they had to close the position and the exchange had to pay up. Looks like they didn’t actually have the assets to do this last part though, which is the only really bad part of all of this. Traders blow up all the time, but you have no business calling yourself a futures exchange if you make other traders absorb those losses. The typical model for a real exchange is for th exchange itself to maintain capital reserves sufficient to make traders whole in these circumstances. OKEx doesn’t really have any business purporting to be an exchange (and couldn’t, legally, under US law I believe) if it isn’t maintaining these capital reserves. Doesn’t seem unusual for this space though.

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