What the June 26th BTC crash tells us about market structure and the need for proper trading tools.
On Wednesday, June 28, Crypto exchange Coinbase had a brief outage (both their API and website) and Bitcoin promptly crashed18% over the next 15 minutes. That’s almost a 20% decline in a single asset’s value in literally 10 minutes. This is a truly horrific bit of price movement.
I still don’t know if this shutdown is entirely understood by the general marketplace. Regardless, Coinbase knows what happened, and as it relates to this article, it really doesn’t matter what the cause was. It’s also hard to discern if they’ve been completely forthcoming providing all the information to explain exactly how this played out.
That said, what we saw leading up to the crash was a heavy influx of volume as the BTC and general crypto market rallied. This had the effect of putting stress onto the system and then raises a kind of chicken in the egg situation in the leadup to the market’s crash — did heavy volume, poor liquidity and an overabundance of orders cause Coinbase to shut down or did Coinbase shut down on its own right because they had some unrelated technology issue. Then, with the system shut down, there was panic and a huge influx of orders. Regardless, a major exchange went down, and that should never happen.
No other exchange crashed. To name just a few — Binance, Bitfinex, Gemini, etc. — did not crash. Coinbase was the only exchange that failed to execute orders in that moment. This makes paramount the need for a major reformation in the crypto infrastructure so A) these kind of outages in highly volatile markets with tremendous price movements don’t ever happen and B) there needs to be other types of infrastructure in place that can help people cope with times of such duress. Within the exchanges themselves, there’s certainly different things that can be done to help mitigate if not prevent this type of price volatility. Aside from the technology itself not going down to begin with, there could be market structures put in place that allow for heavy volume and large orders. This can be done with different order types and exchange rules (speed bumps), which have the effect of regulating the flow that comes in at any given moment and manage that in a more systematic and fluid fashion.
Just as critically, traders also need access to all the other exchanges at times like this so, when one exchange goes down, they can quickly execute orders at other exchanges and through other sources of liquidity and continue to trade in and out of their positions. If Coinbase is down, they need to quickly jump into Binance or Gemini or some other exchange where they liquidate or trade around their positions.
The best way to do that is with some proper functioning technology, like an OEMS — order execution management system. Tiger Trading is an OEMS, which enables users to manage and trade all their accounts from a single platform. Tiger gives you the pipes or the highway into all of these other liquidity sources so that when there is a hiccup or crash on one venue, a trader can seamlessly place orders into another. Regardless of whether you had a position on Coinbase when it crashed, and you needed to get out of that position, you’re still leaving a lot of money on the table by not having accounts at other exchanges. If you’re paying attention to the market at that given moment and you see Coinbase is down and you have some technology that gives you access to other exchanges, then you can quickly jump in take advantage of the price action, particularly if the access point has direct connectivity and low latencies.
The trader can play defense and exit their position, albeit in a declining market, but perhaps with better result than just sitting and waiting for the trade to get done on Coinbase when it reopens. And there’s other more proactive types of trading postures to execute, like trying to sell ahead of the move, or during the move as other people are panicking as the move continues to get over extended. Or take advantage of the collapse and look to put some bids in some markets that are starting to look to be more stable.
I like to compare crypto exchanges to what I call the mature capital markets. I’m referring to foreign exchange and equities, which are the most electronified and have been trading electronically for around 30 years. Those exchanges don’t go down. If they did, even for just a moment, because one had some kind of lapse, the markets trade globally and interrelated, and liquidity is picked up very quickly elsewhere in a pretty seamless fashion. If an equities or FX exchange did go down in any kind of way, that would be a much larger problem than the variable price action in the moment. While there would be some momentary disruption, there wouldn’t be an 18% decline like we saw in BTC/USD. Whether liquidity is picked up on a different exchange or circuit breakers within the exchange are set off or some quick fix, they’re much more equipped to handle these types of issues.
Part of that is singularity and protocols and connectivity, like FIX 4.4. Regardless, it’s something that doesn’t yet exist in our space. We at Tiger Trading are making big strides to promote more consistency among liquidity and to provide access into multiple venues.