People who lost money when the price of Ethereum dropped from about $320 to a mere 10 cents a token after a “flash crash” will be reimbursed by concurrency exchange Coinbase Inc., the company announced over the weekend.

The flash crash would appear to have been triggered by a number of in-place orders and automated trading systems after one user of GDAX, the digital currency exchange run by Coinbase, placed a multimillion-dollar Ethereum sell order. That resulted in orders being filled from $317.81 to $224.48, a 29.4 percent price plunge but as this occurred, “a cascade of approximately 800 stop loss orders and margin funding liquidations [kicked in], causing ETH to temporarily trade as low as $0.10,” the company said in a blog post.

A stop-loss order is an outstanding order on a tradable equity that triggers a sell order when the price of the equity drops below a certain price point. But margin trading requires more explanation. That allows an investor to acquire more of a given equity without having the actual funds to acquire the equity, essentially taking a loan with the equity itself being used as collateral. In the event of a rapid price drop, a margin call is made whereby the collateral equity is sold off to minimize potential losses to the borrower and the person who took the margin loan to begin with.

In traditional equity markets, the margin loan is provided by a third party, usually a merchant bank or stock broker to invest in other markets. Coinbase is different; it provided the margin loan, the market in which the equity is traded and the margin call facility. Whether this means it is somewhat more liable legally isn’t clear, but it may be part of the motivation behind its decision to refund customers affected by the flash crash.

The company said in a second blog post that all existing trades will be honored and no trades will be reversed. But those who had margin calls or stop-loss orders executed  were to receive a credit using Coinbase’s own company funds.

Given that Coinbase’s liability in the matter is questionable at best, why would it compensate users potentially to the tune of as much as $10 million? Betanews described it best: “By compensating customers who have lost money during the narrow trading window, the exchange is telling investors that it can be relied upon even when things take an unexpected turn, which gives it — and the cryptocurrency market — more credibility.”

Image: Ethereum.org