OKEx — It’s Time to Pay the Piper
Over the past week we have seen behavior indicative of market manipulation by OKEx, and estimate $400mm+ of futures contracts have been forced into liquidation as a result.
The Bitcoin Cash ($BCH) network goes through regular protocol upgrades twice per year. As there has been conflicting consensus changes between different development teams, a hard fork was scheduled occur on the 15th of November around 4:40 PM GMT. As the battle between Bitmain (ABC) and CoinGeek (BSV) intensified, exchange operators have had to pick a side regarding which chain they will continue to reference their indices against.
OKEx decide their stance ahead of the fork, quoting ”After the hard fork, our BCH futures contracts subject will be BCH (Bitcoin ABC)”. The full announcement can be read here.
OKEx decided to reference ABC, following suit of many other exchanges. In an outcome where two chains would not co-exist after the fork and BSV is the surviving chain, the value of the prevailing future contracts (which now reference ABC) could settle worthless. Market participants began pricing for this risk accordingly, selling the contracts in anticipation to cover it back lower ahead of the pre-fork snapshot. We also highlighted this opportunity in our recent post which can be read here.
With the BSV camp gaining momentum over ABC going into the scheduled hard fork, future contracts on both BitMex ($BCHZ18) and OKEx ($BCH1116 and $BCH1228) were starting to price in steep discounts to BCH spot markets.
OKEx announces an “Update on Indices Computation Rules & Indices Constituents for Futures Trading”. In this update, OKEx decided to change constituent calculations by discontinuing to reference Bitfinex prices in the spot indices. By changing the rules of the settlement index, they forced the market to reprice the index basis; a drastic change given the large open interest in the market and the significant USDT-to-USD discount. We see this as a deliberate attempt to interfere with prices of the underlying futures contracts, amidst live trading.
OKEx BCH futures trade limit-down, with the contracts (referencing ABC) pricing a 25% discount to the prevailing BCH spot index. Trading is halted as order submissions are no longer allowed. During this time, Poloniex-ABC and the equivalent BTC-denominated BCH contract on BitMex ($BCHZ18) is trading at a 20% discount to OKEx.
Instead of allowing the market to free-float, or continuing to enforce the limit-down rule, OKEx announces that they will settle the BCH futures contracts early against the last traded price at 09:05AM Nov 14, 2018 CET (UTC +1). The full announcement can be read here:
By changing the settlement date and delivery rule against the open interest in the market, they invalidated their previous announcement. This meant that for each short position carried in the contract, OKEx implicitly imposed a fixed loss on the notional amount, delivering the contract 20% higher vs fair value. This is no different than the Chicago Mercantile Exchange (CME) announcing that the S&P 500 E-Mini Futures will settle against the Shanghai Composite Index in the midst of trading.
296,316.51 BCH worth of contracts settled at $80 higher vs ABC ($330 on Poloniex-ABC vs $408.8 OKEx), bringing the aggregate loss for short-positions in the market to roughly $24mm. There exists market speculation that OKEx’s internal trading desk carried the opposite position against short-sellers.
As the market had already priced for $BCH1116/1123/1228 contracts to settle against ABC (as per the previous announcement), they effectively also forced all market participants with dual-legged trades to liquidate long positions in ABC-related risk, resulting in a slew of liquidations in $BCHZ18 and Poloniex-ABC, causing sharp declines. This is indicative of outright market manipulation and one of the more serious acts of fraud in the history of limit order book trading in the cryptocurrency markets.
In the official announcement, OKEx cites: “there is no Bitcoin ABC trading pair with enough market depth and trading volume to compose an index for delivery”. However this is contradictory, as the average volume in the pre-fork ABC and BSV pairs on Poloniex were exceeding 1,000+ BTC-equivalent per day, each. For comparison, this is 50%+ higher than the average 24h volume in BTG (as reported by CoinMarketCap), which composes the spot index against which the OKEx BTG futures settle against.
November 15 (12AM — 2AM HKT)
OKEx’s order submission system starts malfunctioning. Both buyers and sellers are unable to submit orders due to a “Limit Order Bug”. This problem was consistent for all users, both manual point-and-click traders, as well as program traders interacting with OKEx via API. Over a period of 2h+, market participants were unable to reduce or add risk during the most volatile trading session in 9 months.
The market estimate of total liquidations during this period exceed USD 400mm+ notional with the following USD-equivalent breakdown per ticker:
12mm BTG & ETC
We estimate the aggregate loss from all margin accounts to be around 10% of the total liquidation value. Recorded level-2 data throughout this period shows the order matching engine as functioning. The exchange continued to host traffic and operate but with all order submissions blocked, except buy-orders below the best bid, and sell-orders above the best offer.
OKEx insists that this was due to a ‘system overload issue resulting in instability on the price limit endpoint’. However, in the case of traffic overhaul on the back of a rush of simultaneous orders, the back-end infrastructure would not be able to process requests beyond the server capacity. The exchange either generates a response with the correct order information, or refuses to process an order submission request. To put it differently; spreadsheet calculations do not change when Microsoft Excel is crashing. The back-end either generates the correct price limit, or stops altogether, there can be no in-between. Since the issue is not due to overload, the only plausible explanation is internal manipulation.
With market participants unable to act as takers, the only price-aggressor in the order book during the ‘system overload’ could have been OKEx themselves.
Earlier this year on March 30th, OKEx faced a large cascading liquidation event which wiped out a a large number of margin accounts. The exchange decided to roll back all trades preceding the contract liquidations, citing ‘market manipulation’. However in the latest incident, OKEx has decided not to roll back any trades, and has yet to issue an official announcement. We view the change in stance this time as being due to the positioning of their internal trading desk (which nets off as zero vs. the rest of the market).
November 15 (10:48PM HKT)
Following scrutiny from the trading community, OKEx shares the following link on Chinese social media:
The article, by ‘Honeycomb Finance’ references a Reddit post by an ‘independent trader’ under the moniker u/Allofoobtc who has written a lengthy post on the reasoning behind OKEx’s early contract delivery. The style, language and content of the post exhibits a striking resemblance to OKEx’s own explanation. The timestamps between the Reddit post and Honeycomb’s publication are 2 hours apart.
Upon deeper inspection, we see that the u/Allofoobtc account has been active less than 2 months, and has only 4 posts of which: 1 post questions rival BitMex over “unethical operations”, 1 post criticizes rival Huobi, 1 post shares a ‘Guest Author’ article praising OKEx over rival BitMex (sponsored), and the most recent post validating the early contract delivery on OKEx as a “good decision”.
With basic abductive reasoning it becomes evident that the operator behind this moniker is OKEx, and that the exchange (probably) paid CoinIdol for the BitMex vs OKEx article, and also sponsored Honeycomb to publish the Reddit post. Honeycomb is likely OKEx’s external crisis-PR firm, having been the sole media outlet to have hosted an interview with Star Xu (OKEx CEO) following his recent arrest.
OKEx silently makes an amendment to a previous announcement. The below snapshot, from November 12, details the BSV distribution plan in bullet point 3. This term states that if users have outstanding borrow of BCH, the will not need to repay BSV.
The below snapshot is the same announcement page, amended. In an underhanded attempt to deceive their users, OKEx’s removes the original bullet point 3 entirely. The post was originally published on November 12, and shows as ‘last updated’ on November 17.
OKEx imposes a BSV liability for BCH borrowers. In the new announcement, they state: “ If you have an outstanding BCH loan amount: you will have to repay the amount in BCHABC and BCHSV based on the ratio 1 BCH = 1 BCHABC + 1 BCHSV. First, the USDT in your margin account will be converted to BCHABC and BCHSV according to the token trading market price of that time to repay the amount. Then, if it is not enough, you will have to cover the amount by your BCHABC and BCHSV distribution.”
- OKEx originally stated BCH borrowers will not need to repay BSV. Multiple users in the trading community also received ongoing validation from OKEx customer support, reaffirming this policy.
- OKEx quietly amends the original announcement, removing and invalidating the prior policy.
- OKEx announces that users who have borrowed BCH now owe both ABC and BSV to the exchange.
Should there be evidence beyond reasonable doubt that no act of gross negligence or market manipulation has taken place, there would be no need for OKEx to hide behind anonymous monikers and resort to sloppy, unsophisticated propaganda. The course of events surrounding the BCH hard fork are indicative of market manipulation, fraud and deceit.
OKEx has failed to provide an explanation.
As an active market participant and liquidity provider in the global spot and derivative markets, we are calling for regulation and transparency at OKEx in order to promote and maintain a healthy and fair trading environment.
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