Huobi Derivatives Introduces Circuit Breaker and Partial Liquidations

Huobi’s derivatives trading platform, Huobi DM, has announced a new ‘partial liquidation’ feature that aims to limit trading losses.

“We introduced the partial liquidation mechanism on March 5th as part of a system upgrade we rolled out that increased Huobi DM’s throughput, response speed, and stability,” a representative from Huobi told Cointelegraph, confirming the updates are already live. The announcement combines the partial liquidation mechanism, in conjunction with a circuit breaker for decreased risk.

Sudden market swings can immediately liquidate highly leveraged positions and cause extensive user losses, as seen during the last week’s Bitcoin price crash. 

The platform’s new liquidation mechanism will jump into action when markets face turbulence to mitigate the impact on traders, Huobi said in a statement.

Crazy market times cause issues

Amid recent coronavirus fears and market uncertainty in stocks and crypto, asset prices have seen violent swings. Between March 12 and 13, Bitcoin dropped more than 50% in value before bouncing off the bottom. 

During the crash BitMEX saw liquidations top half a billion dollars in an hour. It also went offline, which some users claim resulted in unnecessary liquidations. It blamed denial-of-service (DDoS), attacks as the culprit.

Huobi’s platform saw around $27.45 million in liquidations in a few hours during the crash.

After a stark price swing, liquidation occurs when traders do not hold enough capital in the exchange on which they are trading, resulting in trading position closure. Huobi DM’s new adjustment aims to improve the all-or-nothing liquidation mechanism that wipes out funds all at once.

The new updates, however, are not a direct response to Bitcoin’s recent wild ride, the Huobi representative said, noting the exchanges March 5 launch date for the updates. “This had been in development for some time and is not in direct response to the recent market turbulence,” the rep said.

Huobi DM looks at a different approach

Huobi DM’s new liquidation mechanism offers the option for partial liquidation. The mechanism gradually reduces users’ positions rather than liquidating them in full in a single event. Huobi DM explained:

“With the new mechanism, the system will automatically start liquidating a user's positions in stages—at predetermined margin ratios determined by the user's calculated exposure—until the margin ratio reaches above zero. The liquidation process also includes a circuit breaker function that halts liquidation when large or unusual deviations between the liquidation price and market price are detected.”

Huobi added in its circuit breaker after launching its new liquidation mechanism, although this circuit breaker works differently than those seen in traditional markets, which jump into action at the sight of unexpected wild volatility, the Huobi rep said, adding:

“Huobi DM’s liquidation circuit breaker will terminate liquidation orders on positions where margin ratio is ≤ 0% when abnormal price deviation between the market price and liquidation price is identified. The feature is designed to help prevent unnecessary losses when there are large price swings.”

Huobi DM said the partial liquidation feature applies to all assets and leverages on the derivatives exchange. “When liquidation is triggered, the system will implement the partial liquidation mechanism based on the user’s positions and leverages,” the Huobi representative said.

Additionally, the outfit decreased its maintenance margin ratio, as well as updated its system’s firmware.

UPDATE March 19, 19:09 UTC: This article has been updated with information Cointelegraph received from Huobi after initial publication.