I know that this would have happened during the crash in April. MtGox went out and the market moved so fast that Forced Executed positions where FE'd so low that it would have made lenders loose part of the principal.
What actually happened in April was that BFX investor money stepped in and covered those losses.
What would happen if bitfinex itself went down before/during a crash?
Bitfinex and its API is down atm, does that mean the trade engine is down as well, if not, could that ever happen?
Let's dissect that question from a theoretical viewpoint.
For the platform to work and actually offer the specific financial instrument it does,
three components are involved. Each one of them can of course fail temporarily. Every system is fallible
- the front-end. That is what we, the users see when we deal with Bitfinex. Both the web application and the API count as front-end. This front-end allows us to monitor and control and change our positions, orders, loans. When the front-end goes down during a critical market situation, we loose our ability to react, but the positions and orders as such will be executed according to the rules. Consequences reach from lost opportunities to loosing all of one's account value. Stop orders will protect you against the worst losses for this kind of failure
- the trading engine. This is what watches the market situation, the current position value, and triggers orders. The trading engine going down while the market moves away significantly is kind of the worst-case scenario of technical failure. Since then the platform isn't able to behave according to the rules, any continued operation after such an event could be challenged legally (and those customers getting off worse through such an event might be inclined to try the legal approach).
- Operating a Contract-for-Difference requires a real trading account at some market place. This trading account has the size of all Bitfinex user's positions netted / aggregated. When this backing exchange (or the API link to that exchange) goes down, Bitfinex looses the ability to run its financial construction. But when the actual Bitfinex engine itself continues to work, the platform is able to continue its calculation in theory according to the rules. Thus, this situation creates a gap between the nominal state of affairs, and the actual monetary situation for Bitfinex itself -- and without any doubt the company has to absorb this difference, up to the limits where it goes bankrupt. But such a decoupling of nominal an real position could also create an unexpected revenue for Bitfinex, just depending on the real market movement. It's an interesting question how to deal correct with such a situation (in both legal and moral sense)