Overview of Forced Liquidation
At present, perpetual contract supports leverage up to 100 times. In order to ensure the continuity of position, the trader must hold margin of a certain proportion of position value, also known as maintenance margin. When the position margin of the trader is lower than maintenance margin, the trader’s position will be closed and maintenance margin will be lost at the same time. Such process is known as forced liquidation, also known as close-out.
Only when reasonable marked price reaches forced liquidation price will forced liquidation be triggered. The system will calculate the forced liquidation price with existing positions based on the leverage used by the trader, average position-opening price and margin maintenance ratio.
Calculation of Forced Liquidation Price
Perpetual contract uses reasonable price marking method to avoid forced liquidation due to lack of liquidity or manipulation of the market. The calculation method of forced liquidation is attached.
Normal contract under independent margin condition:
- Long positions Lp=[Hp*Vol*S - (IM-MM)]/[(1-R)*VOL*S]
- Short positions Lp=[Hp*Vol*S +(IM-MM)]/[(1+R)*VOL*S]
Normal contract under cross margin condition:
- Long positions Lp=[Hp*Vol*S - (available balance +IM-MM)]/[(1-R)*VOL*S]
- Short positions Lp=[Hp*Vol*S +( available balance +IM-MM)]/[(1+R)*VOL*S]
LP: forced liquidation price; Hp: average price of held position; Vol: position volume (pcs); S: face value of contract;
IM: initial margin; MM: maintenance margin; R: taker fee rate.
Reduction of Forced Liquidation Event
Perpetual contract uses reasonable marked price instead of the latest market price as forced liquidation price. Reasonable marked price is calculated by referring to the index-based price of several spot markets, thus it significantly increases the difficulty and cost of malicious manipulation of the market.
At the same time, risk limit also requires higher margin level for larger position so that forced liquidation engine can use more margins to close large positions effectively, otherwise these positions are difficult to be liquidated safely. Large positions will be gradually liquidated forcibly under safe situation.
In order to avoid or reduce the occurrence of forced liquidation event, traders can adopt the following ways:
- Adding margin
You can make forced liquidation price far away from reasonable marked price by adding position margin (in case of independent margin) or increase account balance (in case of cross margin).
You can set cross order at any price between forced liquidation price and average position-opening price to avoid forced liquidation.
In the setting process, you need to be clear that what triggers forced liquidation event is reasonable marked price while the default trigger price type of cross order is the latest market price. You need to select appropriate trigger price type in the settings of cross order to avoid the circumstance that forced liquidation event has occurred but no timely stop-loss as the latest market price has not reached trigger price.
Forced Liquidation Process
If forced liquidation is triggered, the system will cancel all untraded orders of the contract to release margin and maintain position. The orders of other contracts will not be affected. The platform applies partial forced liquidation mechanism. The mechanism will automatically try to reduce the requirements of maintenance margin to avoid that all positions are liquidated forcibly.
User with Minimum Risk Limit
The system will cancel all untraded orders of the contract.
If the requirement of maintenance margin is still not met at such time, the position will be taken over by forced liquidation engine at bankruptcy price.
User with High Risk Limit
Forced liquidation engine will try to reduce the risk limit of the user in the following ways to reduce margin requirements:
- Cancel untraded orders but keep existing position to reduce the risk limit of the user.
- Submit FillOrKill (Fill or Kill) order the value of which is equal to the difference between the current position value and the risk limit value compliance with the current margin requirements so as to avoid further forced liquidation.
- If the position is still under forced liquidation status, all positions will be taken over by forced liquidation engine at bankruptcy price.