In the aftermath of last week's cryptocurrency market crash, the Huobi exchange has launched a liquidation mechanism that would pull the plug on trading should prices become too volatile.
The Singapore-based firm said Wednesday the new mechanism, integrated into its crypto derivatives marketplace, would halt all liquidations – where a trader's position is automatically closed – during periods when volatility starts to present a real risk for traders.
Such sudden and large movements may catch traders by surprise leading to a sudden rise in volatility levels. Ciara Sun, Huobi's vice president of global business, said market volatility can "lead to unnecessarily high-risk circumstances if the right measures aren't in place to protect them."
Liquidation risk mechanisms are commonplace in traditional markets where they are used to temporarily halt trading. Known as circuit breakers, they are activated to stop panic selling when markets come under sudden and extreme duress.
The New York Stock Exchange, for example, has activated circuit breakers in the immediate aftermath of 9/11 and during the 2008 financial crisis. Stock exchanges all around the world, including NYSE, have recently been forced to trigger them again as the coronavirus pandemic sparked a global sell-off in equities.
Huobi's mechanism doesn't halt trading as does a conventional circuit breaker; it only halts liquidations on leveraged positions. It can also gradually liquidate positions, rather than doing so in a single event. There are some other exchanges that use a similar sliding mechanism, such as rival crypto derivatives platforms, Bybit and FTX.
In the past, crypto volatility levels have spiked following short or long squeezes – mass liquidations from unexpected changes in the underlying assets that exacerbate movements. Sun added that a partial liquidation mechanism could create a more "robust trading experience," minimizing downside "without diluting the potential upside."
UPDATE (Mar. 20, 17:15 UTC): This article has been updated to clarify that Huobi’s liquidation mechanism doesn’t halt trading as do conventional circuit breakers, just the liquidations on the platform.
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