Author:
Huobi Group, a leading digital currency company, through its subsidiary Huobi DM, has launched a new “partial liquidation” mechanism in a bid to protect Futures traders against risks during times of heavy plummets in the cryptocurrency markets, according to a press release.
Huobi DM is digital assets derivatives trading platform of Huobi Group. The move to create this mechanism, which is quite similar to Wall Street Circuit breakers, is coming as a result of the most recent price plunge that affected many traders, especially users who trade cryptocurrency-based Futures contracts.
What Are Circuit Breakers?
In traditional markets, circuit breakers are key levels and mechanisms designed to shield against the harsh effect of a massive price plunge and market sell-off. These regulatory mechanisms have been existing in the stock market since October 1987, during the period when the Dow Jones Industrial Average lost almost 23% (508 points) in a single day.
Circuit breakers are automatically triggered to temporarily halt trading when prices hit a predetermined level. According to the NYSE, there are three circuit breaker triggers. If the S&P 500 falls to 7% (level 1) or 13% (level 2), for instance, the circuit breaker halts trading on all exchanges for 15 minutes. And if the S&P 500 plunges 20%, trading activities on all exchanges will be suspended for the rest of the day.
Using Circuit Breakers For Crypto
The new mechanism from Huobi will hedge users against risks by automatically reducing traders’ positions in stages rather than liquidating them in a full, single event. The system will gradually start liquidating the positions based on predetermined margin ratios set by the trader’s calculated exposure until the margin ratio reaches above zero.
Futures traders on Huobi DM can use the partial liquidation for all cryptocurrencies and leverages available on Huobi DM for free. The platform has also reduced its key liquidation indicator that has a direct impact on how margin ratios are calculated to reduce the frequency of liquidation events.
“Market volatility creates new arbitrage opportunities for users, but it can also lead to unnecessarily high-risk circumstances if the right measures aren’t in place to protect them. Our goal is to safeguard our users’ assets while providing a robust trading experience, so we’re using this partial liquidation mechanism to minimize the downside without diluting the potential upside,” Huobi’s VP of Global Business, Ciara Sun said in the announcement.