Home / Biboxpedia /Coin-margined contract / What is Liquidation?
What is Liquidation?
2020-11-19 13:48

What is liquidation

Currently, perpetual contracts support up to 100 times leverage. To ensure that the position can continue, traders must hold a certain percentage of the value of the position as a margin, also known as maintenance margin. When the trader's position margin is lower than the maintenance margin, the position will be closed, and the maintenance margin will be lost at the same time. This process is called forced liquidation or liquidation.
The liquidation will only be triggered when the marked price reaches the liquidation price. The system will calculate the liquidation price for a position based on the leverage used by the trader, the average open price and the maintenance margin rate.


Liquidation Price Calculation

Perpetual contracts use price marking methods to avoid liquidation due to lack of liquidity or market manipulation. Attached is the calculation method of liquidation:

  • Long position Lp= [(1 -Taker rate) * position amount * contract value] /[position value + (available margin – maintenance margin) ]
  • Short position Lp= [ (1+Taker rate) * position amount * contract value ]/ [ position value - (available margin – maintenance margin) ]

Available Margin:

  • Fixed margin = initial margin + added margin
  • Cross margin = available assets + initial margin + added margin + equity of reverse position (equity of reverse position=margin of reverse position+ unrealized profit & loss)

Reduce Liquidation

Perpetual contracts use the mark price as the liquidation price instead of using the latest market price. The mark price is calculated with reference to the index prices of multiple spot markets, thus greatly increasing the difficulty and cost of malicious manipulation of the market.

At the same time, the risk limit also requires a higher margin level for larger positions. In this way, the liquidation engine can use more margin to effectively close amount of positions, otherwise it is difficult for these positions to be safely liquidated. Under safe circumstances, large positions will be gradually liquidated.

Traders can use the following methods to avoid or reduce the occurrence of liquidation:

  1. Margin Call:You can increase the position margin (fixed margin) or increase the account balance (cross margin) to keep the liquidation price away from the mark price.
  2. Stop Loss:You can set a plan order at any price between the liquidation price and the average opening price to avoid liquidation.


Liquidation Process:

If the liquidation is triggered, the system will cancel all unsold orders for the contract to release the margin and keep the position. Other pending contract orders will not be affected. The platform uses a partial liquidation method, which will automatically try to reduce the maintenance margin requirement and avoid all positions being liquidated.

Users who use the lowest risk limit

System will cancel all uncompleted orders of the contract.

If it still does not meet the maintenance margin requirement, the position will be taken by the liquidation engine at the bankrupt price.

Users who use the highest risk limit

The liquidation engine will use the following methods and try to reduce the user's risk limit, thereby reducing the margin requirement:

  1. Cancel uncompleted orders, but retain existing positions, and reduce the user's risk limit.
  2. Submit a Fill Or Kill (full execution or cancel immediately) order. The value of this order is equal to the difference between the current position value and the risk limit value that meets the current margin requirements, to avoid further liquidation.
  3. If the position is still in liquidation, then all positions will be taken over by the liquidation engine at the bankruptcy price.
Return to Bibox website