How to trigger the liquidation mechanism

The liquidation mechanism is designed to protect exchanges and traders from losses caused by extreme market fluctuations. There are two main triggers for this mechanism to be activated: the margin ratio falls below the maintenance margin requirement or market volatility causes losses to exceed the available margin. When the triggering conditions are met, the exchange will take the following steps to perform liquidation: check the margin ratio and loss amount, notify traders, automatically sell positions to recover funds and make up for losses, and return remaining funds to traders.

Liquidation mechanism trigger conditions

• The margin ratio is lower than the maintenance margin requirement:When a trader’s margin ratio falls below the maintenance margin requirement, the exchange may trigger liquidation. Maintenance margin requirement is the minimum ratio between margin and trade value.
• Market volatility causes losses to exceed margin: Exchanges can also trigger liquidation when market volatility causes traders to lose more than their available margin.

Steps to implement the liquidation mechanism

• Check margin ratio and loss: When one of the trigger conditions is met, the exchange will check the trader’s margin ratio and loss amount.
• Notify traders: In most cases, the exchange will send a notification to traders informing them of an impending liquidation.
• Automatic selling of positions: The exchange will automatically sell the trader’s positions to recover funds and make up for losses.
• Remaining Fund Return: After liquidation, if there are still remaining funds in the trader’s account, the exchange will return it to the trader.

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