Struggling to recover from the most recent Bitcoin flash crash which originated on Bitfinex only four days go, Bitcoin prices took another dive today as margin traders got their positions liquidated on BTC-e.
The event started at 1:36 PM (UTC+1) when large sell orders began to show up on the third largest western Bitcoin exchange BTC-e. Downwards momentum increased steadily as the orderbook became increasingly thin, crashing prices to a low of USD 309 per Bitcoin at 1.43 PM. In the following minutes prices rebounded swiftly on thin volume back to around USD 442 as arbitrage traders started to take advantage of the discount relative to other exchanges.
BTC-e is one of the few large exchanges that offer margin trading to their clients via the MetaTrader platform since November 2013, but the details of who excactly provides the funds necessary for margin trading have remained unclear. The shape and especially timing of the crash points towards margin traders being liquidated (or stop orders being executed), similar to what happened on Bitfinex a couple of days ago.
However, unlike Bitfinex which is transparent about open swap positions, BTC-e does not provide important data which would be needed to provide a more thorough analysis and so this last statement can only be considered a good guess.
Unlike Bitfinex, which relies on a hidden algorithm in an effort to control the order flow, BTC-e seems to have no special safeguards in place to mitigate such events. The fall below 400 was mainly due to a lack of bids in the orderbook and not because the market believed that the true value was below 400, as the rebound back to over 440 only minutes later basically proved. Hence, halting trading during extreme downwards volatility could have easily averted the bloodshed among margin traders by giving other market participants more time to thicken the orderbook.
Update 4:58PM (UTC+1):
BrCapoeira posted on Reddit an interesting graph based on data from the Metatrader platform:
This graph implies that a single large order was the cause of this event. Whether this order was created due to a margin call, a simple mistake, to manipulate the market, or to open a large short position remains unclear. Common sense would suggest that it was probably the result of a margin call of a single large trader.