Deribit recently announced they have suffered losses due to liquidations triggered by margin calls. Essentially what happened was as the market prices changed, margin calls and forced liquidations were triggered, and the market did not have enough liquidity to fill all the orders in an orderly manner, so as positions were blown out, there was a big gap in fill prices to where theoretical prices might be. The beneficiaries were the market makers who let the market gap down, then filled margin liquidation orders at prices well below expected prices. The exchange made up the difference (since the liquidated positions were the result of margin calls), and then asked major market makers to eat some of the loss, which it sounds like they did. Below is a copy of the text provided by Deribit.
The case highlights another situation where market participants are at risk since crypto financial intermediaries such as exchanges provide users with too little information about their financial position. With the absence of clearinghouses or independent rating agencies, users are left bearing a lot of risk, and its difficult for users to guage the magnitude of this risk.
Yesterday around 14.00 UTC we had liquidation algorithms of portfolio margin users creation a chaos in the 29 December future. This resulted finally in bankruptcies of more than 105 BTC. Further various client accounts had unjust losses due to liquidations as well.
We had to halt trading yesterday for a while to fix the issue before we could continue again. We are sorry for the downtime.
We solved the issue of the losses by contacting our biggest market makers and traders that have been making profits trading against the malicious algorithm at prices far above the market. We are grateful for their understanding of the incident and for their direct support of our exchange.
Further we decided to refill the insurance fund further such that all other traders will remain completely unaffected and no profits will be socialized among other traders in this session at all.
The total final loss left for the exchange amounts to around 60 BTC (or USD 235.000 at the time of writing). Please note that all users’ funds are safe and we as an exchange can, of course, handle a loss of 60 BTC. The exchange will continue operating as normal.
This was our first major incident since we opened doors for trading in the summer of 2016. We will work hard now to improve various liquidation algorithms such that this could never occur again. This might further delay the launch of new products like Ethereum futures and our upcoming Spot Exchange.
The insurance fund will also be replenished again with 25 BTC.