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Coinbase Under Scrutiny: Here’s What That Means

by on October 5, 2017

Bloomberg reported today that the Commodity Futures Trading Commission has requested information from Coinbase Inc. regarding an incident that happened back mid-June rooted in Ethereum trading over its GDAX platform and the impact that said trading had on the price of Ethereum at that time.

For those that don’t remember the event, Ethereum was trading at more than $300 apiece and then quickly collapsed to trade below one dollar. The decline didn’t last too long, with Ethereum recovering during the few minutes subsequent to the crash, but a number of people lost money on the event and it was enough to draw the attention of regulatory bodies.

It’s worth noting that Coinbase compensated anybody that did lose money and that the company is fully regulated, so the fact that it is generating CFTC attention isn’t surprising and certainly doesn’t imply that it did anything wrong. With that said, however, the whole situation raises similarities between the cryptocurrency market and other, more traditional financial asset markets that have been subject to these sorts of flash crashes in recent years.

In the equities markets, for example, algorithmic and high-frequency trading have caused flash crashes; not quite to the same extent as that with Ethereum but similar in timeframe. The same is true of HFT trading the Forex markets.

The same is true of HFT trading the Forex markets.

What caused the situation in Ethereum remains to be seen – there are suggestions that it was a large sell order triggering automatic stop losses – but it could have ramifications for the way people trade across these exchanges going forward.

Coinbase has already removed its margin trading feature meaning that, as a regulated entity, it is unlikely that any other exchange (assuming it is subject to the same regulation) will be able to offer margin trading in cryptocurrency or, if it can, the margin offered will have to be decidedly small.

One thing is for sure, this won’t turn out to be an isolated incident.

As markets mature into billion-dollar financial assets that are then traded across an exchange, people will always look for ways to increase the edge they hold over competitors. High-frequency trading and large orders are one way to do exactly that, so there’s a good chance we will see more of it in the future.

Image courtesy of Coinbase.

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