Liquidation Mechanism

Our exchange takes careful measures to ensure fair but quick liquidations that minimize market impact. Our comprehensive approach involves several components.

Volume-Limited and Partial Liquidation

We detect and compile all traders' positions that fail to meet the maintenance margin requirement. Any open orders for liquidatable traders are immediately canceled.

Then we attempt to close just the minimum amount of each trader’s position to put the position above the initial margin requirement. If the user meets the margin requirement after liquidation, then the process will be halted. When closing positions, the exchange will send volume-limited orders. The size of these liquidation orders is restricted to limit the potential market impact from the liquidation process. Upon forced liquidation, the exchange will charge a liquidation fee. Note that the fee will be charged solely on the amount that is liquidated, and not on the entire value of the position.

Position Takeover and Time-Averaged Liquidation

In most cases, prompt liquidation orders will be enough to handle the liquidation process. However, when prices move sharply in volatile markets, the standard liquidation orders may not be able to close down all positions due to high market price impact.

In this scenario, the exchange will step in and take over the trader’s (remaining) position before the trader’s account value drops below zero. The exchange can then slowly unload the positions over time once the market slows down. This time-averaged liquidation approach is an effective way to maintain market stability. We expect that this setup will suffice to prevent any significant clawbacks from taking place.

Insurance Fund

There will be rare cases when a trader’s position is unable to be liquidated before the trader’s account value becomes negative. Such a trader is said to have bad debt. In this case, the insurance fund will cover the bad debt. The insurance fund is a special reserve that acts as a financial buffer to protect the exchange’s stability during extreme market volatility.

Auto-Deleveraging (ADL)

We believe the above methods are more than sufficient to handle liquidation in the most extreme of market conditions. However, there may be an extremely rare case where the insurance fund is at risk of depletion. In such a scenario, we employ auto-deleveraging.

The exchange will identify traders with the highest leveraged positions and assign them a priority order for deleveraging. In priority order, traders will have their positions partially closed to cover the losses incurred in the liquidation process. ADL aims to allocate the losses from liquidations to the traders who have the most risk in the market due to high leverage. It is used as a last resort when the exchange is unable to close positions without causing further market disruption.