We're going to pick back up here with our anthology of documented 'Flash Crash' incidents that occur with concerning frequency on Kraken's exchange.
Kraken Flash Crash #2 — April 25th, 2019 [Bitcoin Market; BTC/USD]
On April 25th, 2019, the price of Bitcoin wicked down to $1,000 on Kraken’s exchange.
Kraken Flash Crash #3 — September 4th, 2018 [Ethereum Market; ETH/USD]
On September 4th, 2018, the price of Ethereum on Kraken’s exchange fell by over $40, spontaneously, in the ETH/USD markets.
This downward price move did not reflect trading activity on any other major exchanges at the time.
Below is a picture of the ‘flash crash’ on Kraken for Ethereum:
The drop represented an approximate (spontaneous) loss of -17% of Ethereum’s value.
While this may not seem like a lot, the time frame of the ‘flash crash’ as well as the volume of trading that occurred at this lower is worth noting.
Volume and Time of the Ethereum Flash Crash
According to ‘TrustNodes’, a longstanding cryptocurrency publication, during the flash crash, there were, “18,000 eth sold and bought within 1 minute at precisely 4:59AM London time.”
This volume would represent a total of $4M-$5M worth of trade volume in just one minute on Kraken. Whether this can be attributable to bots taking advantage of the insane arbitrage opportunity that such a ‘flash crash’ more than likely provided or a planned, executed exploitation of the situation, the volume is clearly indicative of some sort of measure(s) put in place beforehand (benevolent or nefarious) to take advantage of such an opportunity should it arise.
As seen above, ‘TrustNodes’ entertains the possibility that this -17% wick may have been due to ‘fat fingers’ (a term used to humorously refer to the idea that a trader’s fingers are so ‘fat’ that they hit a different key on the keyboard than they intended target, leading to a simple clerical error; in essence, a simple human mistake [whether due to ‘fat fingers’ or otherwise]).
Once again, however, in this situation, without pinpointing additional mitigating evidence to corroborate this explanation (i.e., a user reporting verifiably reporting that they were responsible for said trade/public statement from Kraken exchange confirming such), there is no reason to accept that this strange depreciation in price was due to ‘fat fingers’ or any other user-sourced error.
Thus, it is just as possible that this error could have manifested itself via some sort of nefarious means.
Kraken Flash Crash #4 — March 19th, 2018 [Ethereum Market; ETH/USD]
Multiple users on various social media outlets reported a flash crash in the Ethereum (ETH/USD) market on Kraken exchange on March 19th, 2018.
Below is one of the posts from a Kraken exchange user that recapped the incident on Reddit:
While the picture isn’t the clearest, what can be seen is an enormous wick for Ethereum on the 1-minute chart time resolution, showing the price crashing from approx. $530 down to as low as $435, representing a -18% delta in just one minute.
The volume in bars at the bottom of the chart displayed above show a noticeable spike in volume that appears to be exponentially greater than what the typical volume was for all periods before and after the period when the ‘flash crash’ occurred.
Absolutely none was put forth by the community, meaning that your guess as to what happened here is as good as anyone else’s
Kraken Flash Crash #5 —May 7th, 2017 [Ethereum Markets; ETH/USD]
This is perhaps Kraken’s most infamous ‘flash crash’ to date as it resulted in a class action lawsuit by the Silver Miller law firm for tens of millions of dollars in damages.
Additionally, the multi-dimensional nature of the attack left many users questioning exactly what had happened.
On May 7th, 2017, there was a ‘flash crash’ in the ETH/USD market on Kraken’s exchange.
The price drop was captured by numerous members of the cryptocurrency community on social media and elsewhere.
Most notably, Tuur Demeester, longstanding member of the cryptocurrency community provided commentary on the ensuing price drop (as can be seen below):
Below is the picture provided in the tweet in the above screenshot:
As one can see in the chart above, it appears that the price of Ethereum falls from a value of approximately $90-$95 all the way down to a session low of $29.75, representing a loss of approximately 70–75% as Demeester suggested in his tweet (cited above).
Kraken ‘Denial of Service Attack’ Hit Simultaneously
As if the aforementioned attack were not bad enough, users were apparently hit with some sort of ‘denial of service’ attack simultaneously, which rendered traders unable to adjust their positions in order to mitigate losses during the ‘flash crash’.
However, this ‘denial of service’ apparently did not affect all users because trade data shows that there were clearly algorithmic bots that were still able to access to the markets (either via API or other means) in order to place and fill orders (some of them maliciously).
Afterward, Kraken Asserts that the Denial of Service Attack on Users Was Entirely Unrelated
Over the next 24 hours, Kraken published several statements on multiple different social media platforms (as well as their own website), where they claimed that the Denial of Service attack on the exchange that impacted users during the ‘flash crash’ of the ETH/USD market on the exchange was entirely unrelated to said ‘flash crash’.
Below are screenshots of Kraken delivering this announcement to users in the r/ethtrader subreddit on the following day, May 8th, 2017 (posted by Jesse Powell, CEO of Kraken Exchange):
Summarizing the Reddit Announcement:
Kraken claimed that the DDoS attack did not “cause or exacerbate liquidations”. While it could be possibly be argued that the DDoS attack did not, in itself, cause said liquidations, it is hard to imagine that traders being unable to log in to their accounts to meet margin calls and/or adjust positions/cover their positions or deploy an alternative trade strategy in order to mitigate the situation somehow did not exacerbate the losses due to liquidation.
Claiming, “Once liquidations are triggered, they cannot be stopped”, does not address the obvious grievance that traders were not even granted the opportunity to adjust their trades in such a way where the liquidation event could have been potentially avoided altogether.
Kraken (Jesse Powell, CEO) completely contradicts and defies its logic in the very next bullet point of the announcement by justifying their failure to halt trading during the ‘flash crash’, with the statement, “The consequences for traders would have been even worse. Crypto assets trade on many exchanges and shutting down an individual market simply means that participants there cannot react to the changes elsewhere.”
Essentially what Kraken is saying in this quote is that preventing traders from accessing the exchange to react to the rapidly changing market conditions would have adversely impacted said traders. However, in the previous point, Kraken argued that the denial of service attack (which prevented traders from accessing the exchange) had no impact on how many individuals were liquidated and played no role in exacerbating the attack either.
In response to the self-constructed demand, “Kraken should only liquidate at the ‘real’ price”, the post rebuts this point by stating that traders are encouraged to “use advanced order types such as stop-loss to set their own exits.” However, in an event such as the one that took place on Kraken’s ETH/USD market on May 7th, 2017, it is highly unlikely that a S/L trade would have been effective.
Additionally, as noted before (and implicitly acknowledged by Kraken), many traders cited their inability to access the exchange as a key reason for why they were unable to utilize such advanced order types to provide assistance for their efforts to exit their positions without experiencing maximum loss.
In response to the self-constructed statement, “Kraken should roll back trades”, the post asserts that ‘Kraken cannot roll back trades’, explaining that, “Kraken also took on losses as the result of accounts going negative through liquidations.”
Thus, it appears that the statement ‘Kraken cannot roll back trades’ is inaccurate and that the reality of the situation is that Kraken refuses to roll back trades. ‘Cannot’ refers to some sort of technical/physical impossibility, which did not appear to be the case. Additionally, the explanation Kraken provided for why they could not ‘roll back’ trades actually serves as an apt justification for why Kraken should have rolled back trades.
If Kraken, the exchange, also suffered losses as a result of the ‘flash crash’, then it stands to reason that rolling back said trades would also be in the benefit of Kraken. By refusing to do so, Kraken is essentially stating that they adamantly stand behind their losses (which makes zero sense).
Under the same subsection [Kraken should roll back trades], the post makes the statement, “Unfortunately, for an exchange, market integrity is sacrosanct. Traders must be able to rely on legitimate trades being honored. Any losses today are the gains of the trader who took the risk to provide liquidity on the other side.”
This statement is also problematic because a trader deciding to accept a margin long trade on Ethereum while ETH/USD is trading at more than 70% below the going market rate on all other exchanges during a time where the exchange in question that is offering said prices is clearly compromised is not taking a ‘risk’, and it should be obvious to all market participants that said trades are not ‘legitimate’, because the ‘flash crash’ is clearly not the result of legitimate price discovery, but rather market manipulation or some other nefarious activity/exploit in the exchange’s software itself.
Thus, it comes across as hypocritical, at best, to assert that the “market integrity is sacrosanct”, while simultaneously upholding and legitimizing the activity of bad actors. Additionally, Kraken failed to state whether the flash crash resulted in a net loss or not. While it may be true that Kraken lost some amount of funds on the exchange as a result of these liquidations, the post noticeably failed to mention what profits, if any, Kraken gained as a result of the cascading liquidations, S/L’d positions, etc., from the flash crash.
Kraken also failed to mention whether they were or do hold any positions on their own exchange, specifically on its leveraged markets.
As one can imagine, the general user response to the thread was a mix of anger, frustration, disbelief, and disappointment.
Some interesting responses included screenshots which appeared to show that some features were enabled for some users, while being disabled for others.
In particular, it appears that Kraken had limited how much it could lend to users on margin for the ETH/USD markets due to the limited availability of Ethereum for the exchange:
In follow up editions, we will look at some of the additional factors that make trading on Kraken an extremely risky, if not outright unwise choice for trader in the crypto sphere.