Tiered Liquidation

Note: liquidation is also called forced selling, margin call, or force liquidation.

Liquidation

Because the contract uses leverage, the value of the margin may be less than the value of the position. When the margin is not enough to maintain the position, the system will perform a forced selling operation on the position, which is liquidation.

Liquidation conditions:

Margin Rate <= (Maintenance Margin Rate + Fee Rate)

At the same time, the mark price will also reach the liquidation price, because the margin rate is calculated based on the mark price.

We use the mark price for forced liquidation to avoid forced liquidation due to insufficient liquidity or market manipulation.

How to calculate the liquidation price?

Liquidation process

1. Cancel pending order

When it is detected that the user will be liquidated, the system will cancel all the user's opening orders to release the margin and prevent liquidation.

2. Consolidation of long and short positions

If there are two long and short contracts in one contract, when it is detected that the user will be liquidated, the long and short positions will be merged, and only the delta value will be kept, which can reduce the occupation of margin and prevent liquidation.

3. Start tiered liquidation

Calculate the different positions to the next tier, and liquidate this part of the difference.

All positions will be liquidated by force if it is already the lowest tier.

During the forced liquidation, the position and margin are frozen, and users cannot operate.

What is tiered liquidation？

Forced liquidation of all positions at once is not only unfriendly to users but also has an impact on market liquidity, resulting in large losses after liquidation.

By adopting tiered liquidation, multiple tiers are set up, and each tier corresponds to a different maintenance margin rate. When the system judges that the margin is not enough for the maintenance margin of the tier where the current position is located, it will perform the forced liquidation, reducing the number of positions to the next tier, and only liquidating the difference between the two tiers.

For example:

Position nominal value	Minimum maintenance margin rate
(0, 10000]	0.04%
(10000, 50000]	0.05%
(50000, 100000]	0.1%
(100000, 300000]	0.5%
(300000, x]	x

Position value: 80,000 USDT

Margin rate: 0.08%

Determine which tier you are in: third tier (50000, 100000] 0.1%

Judging whether to liquidate: 0.08% < 0.1% Yes

Forced liquidation position value: 30000 USDT = holding position 80000 - the next highest 50000

Takeover Margin: Liquidation Value * Maintenance Margin Rate = 30000 * 0.1% = 30 USDT

Maintenance margin

The maintenance margin rate is the minimum ratio of the system to allow the position margin relative to the position value. If it is less than this ratio, it is necessary to start liquidation.