Many believe the sell-off by Wintermute caused this, but in reality, the root cause is Binance changing the rules. Although Binance announced it in advance, the actual impact far exceeded expectations.
**Why does a rule change lead to a crash?**
Next, I will gradually analyze this causal chain:
1. **Impact of rule changes**
- Binance adjusts the contract position limits and leverage multiples, initially to control risk and avoid excessive speculation or market manipulation.
- For example, if the position limit is lowered: originally, one account could hold $10 million in contract positions, now the limit is reduced to $5 million, and positions exceeding the limit must be reduced or liquidated.
- Leverage reduction: High leverage (such as 100 times) allows a small amount of capital to control a large position. After leverage is reduced, the position that can be controlled with the same capital becomes smaller, and the excess must be liquidated.
- This adjustment has a huge impact on market makers (MM), as they typically rely on high leverage and large positions to maintain market liquidity and earn price gap profits.
2. **MM's long positions are actively liquidated**
- Market makers typically hold both spot and contract positions simultaneously to hedge risks and provide liquidity. Assuming they hold long positions (bullish contracts), after the rule change:
- If the positions exceed the new limit, or the leverage cannot support existing positions, the system will forcibly liquidate.
- Liquidating long positions means selling in the contract market, thereby suppressing contract prices.
3. **Spot and contract price gap explodes high**
- Usually, spot prices and contract prices maintain a certain correlation through arbitrage. But when a large number of long positions are liquidated:
- Contract prices fall sharply due to increased selling pressure.
- Spot prices may temporarily not keep up with the downward trend of contract prices, leading to spot prices > contract prices, widening the price gap (exploding high). This price gap anomaly is usually short-lived as the market reacts quickly.
4. **Robot arbitrage exacerbates the decline**
- Trading robots (especially high-frequency trading algorithms) capture such price gap opportunities for arbitrage:
- Arbitrage strategy: Buy low in the contract market while selling in the spot market, profiting when the price gap converges.
- Result: Robots sell heavily in the spot market, further increasing selling pressure on the spot, leading to a drop in spot prices.
5. **Spot prices are smashed down**
- MM liquidating long positions suppresses contract prices.
- Robot arbitrage sells spot to lower spot prices.
- The combination of these two forces creates a vicious cycle, market sentiment may shift to panic, retail investors also begin to sell, ultimately leading to a crash.
**Overall mechanism summary**
Rule change → Restricts MM's high leverage and large positions → Long positions forcibly liquidated → Contract prices fall.
Price gap explodes high → Robots arbitrage → Spot selling increases → Spot prices crash.
Wintermute sell-off → May be hedging, reducing positions, or trend-following, further exacerbating the decline.
**The core reason for the crash is that the rule change breaks the original market balance:**
MM forced liquidation triggers a chain reaction, robots amplify the price gap arbitrage effect, market panic and selling sentiment accumulate.
