Liquidation Overview

Liquidation

Liquidation is a system that exists to minimize the traders' losses. The liquidation is triggered by the Mark Price*. The position is liquidated when the Mark Price reaches the Liquidation Price. The liquidation price is calculated on the basis of maintenance margin, entry price, and leverage, which can be adjusted according to the risk limits. In the event of liquidation, the contracts and margin included in the position will be taken over by the liquidation engine and therefore disappear from the trader's Position tab. Traders on MCS can check their maintenance margin in the contract details and the required margin will be raised or lowered according to risk limits. After the position is closed, the trader is free to open a new position.

 

*Mark Price: The Mark Price is made up of the global spot price index and funding basis rate, in other words, a real-time spot price on major cryptocurrency exchanges. 

$$ \small\textsf{Mark Price} = {\textsf{Index Price}\times \textsf{1+Funding Basis}} $$

*Funding Basis: Variable representing the precedence of the futures market over the movement of the spot market. Thus, the difference between the spot and the futures price

\begin{align}&\small\textsf{Funding Basis}={\textsf{Current Funding Rate}}\times{\textsf{Time until Funding}\over\textsf{Funding interval}}\end{align}

 

Caution!

In order to protect traders from liquidation instantly taking place upon the acquisition of a position, market orders and conditional orders which are processed like market order will not be filled if the mark price and the last traded price differ by more than 5%. Thank you for your understanding.

 

 

Isolated Margin Liquidation Price Equation

Long - Liquidation Price

$$ \small\textsf{Isolated Margin Liquidation Price (Long)} ={{\textsf{Avg. Entry Price} \times \textsf{Leverage}} \over \textsf{Leverage(1 - Maintenance Margin Rate) + 1}} $$

 

<Isolated Margin Liquidation Price (Long) Example> 

David goes long 10x @2000 USDT

$$ \small\textsf{Isolated Margin Liquidation Price (Long)} ={{\textsf{2000} \times \textsf{10}} \over \textsf{10(1 - 0.005) + 1}} ≈ \textsf{1,826.48 USDT} $$

 

Short - Liquidation Price

$$ \small\textsf{Isolated Margin Liquidation Price (Short)} ={{\textsf{Avg. Entry Price} \times \textsf{Leverage}} \over \textsf{Leverage(1 + Maintenance Margin Rate) - 1}} $$

 

<Isolated Margin Liquidation Price (Short) Example> 

David goes short 10x @2000 USDT

$$ \small\textsf{Isolated Margin Liquidation Price (Short)} ={{\textsf{2000} \times \textsf{10}} \over \textsf{10(1 + 0.005) - 1}} ≈ \textsf{2,209.94 USDT} $$

 

 

Cross Margin Liquidation Price Equation

Long - Liquidation Price

$$ \small\textsf{Cross Margin Liquidation Price (Long)}$$

$$ \small = {{\textsf{Avg. Entry Price} \times \textsf{Quantity}} \over {\textsf{Quantity(1 - Maintenance Margin Rate + Initial Margin Rate} - {\textsf{Avg. Entry Price} \times \textsf{Taker Fee Rate} \over \textsf{*Bankruptcy Price}}) + {\textsf{Available Balance}\times\textsf{Avg. Entry Price}}}} $$ 

 

\begin{align}\scriptsize\textsf{*Cross Margin Bankruptcy Price (Long)} = {\textsf{1.00075}\times\textsf{Quantity}\over{{\textsf{Quantity}\over\textsf{Avg. Entry Price}}+ \textsf{Available Balance}}}\qquad \scriptsize\textsf{**Available Balance}=\textsf{Wallet Balance}-\textsf{Other Position Margin}-\textsf{Order Margin}\end{align} 

<Cross Margin Liquidation Price (Long) Example>

David currently has 0.2 BTC in his available balance and went long 5,000 BTC/USDT contracts at 2,000 USDT using cross margin.

In order to find the liquidation price, the bankruptcy price must be calculated first. Assuming there are no active orders,

\begin{align}\small\textsf{Cross Margin Bankruptcy Price (Long)}={\textsf{1.00075}\times\textsf{5000}\over{{\textsf{5000}\over\textsf{2000}}+ \textsf{0.2}}}≈\textsf{1,853.24 USDT}\end{align}

 

\begin{align}\small\textsf{Cross Margin Liquidation Price (Long)}={{\textsf{2000} \times \textsf{5000}} \over {\textsf{5000(1 – 0.005 + 0.01} - {\textsf{2000} \times \textsf{0.00075} \over \textsf{1,853.24}}) + {\textsf{0.2}\times\textsf{2000}}}}≈\textsf{1,844.69 USDT}\end{align}

Short - Liquidation Price

$$ \textsf{Cross Margin Liquidation Price (Short)}$$

$$ \small = {{\textsf{Avg. Entry Price} \times \textsf{Quantity}} \over {\textsf{Quantity(1 + Maintenance Margin Rate - Initial Margin Rate} + {\textsf{Avg. Entry Price} \times \textsf{Taker Fee Rate} \over \textsf{Bankruptcy Price}}) - {\textsf{Available Balance}\times\textsf{Avg. Entry Price}}}} $$

 

\begin{align}\scriptsize\textsf{*Cross Margin Bankruptcy Price (Short)} = {\textsf{0.99925}\times\textsf{Quantity}\over{{\textsf{Quantity}\over\textsf{Avg. Entry Price}}- \textsf{Available Balance}}}\qquad \scriptsize\textsf{**Available Balance}=\textsf{Wallet Balance}-\textsf{Other Position Margin}-\textsf{Order Margin}\end{align}

 

<Cross Margin Liquidation Price (Short) Example>

David currently has 0.2 BTC in his available balance and went short 5,000 BTC/USDT contracts at 2,000 USDT using cross margin.

In order to find the liquidation price, the bankruptcy price must be calculated first. Assuming there are no active orders,

\begin{align}\small\textsf{Cross Margin Bankruptcy Price (Short)}= {\textsf{0.99925}\times\textsf{5000}\over{{\textsf{5000}\over\textsf{2000}} - \textsf{0.2}}}≈\textsf{2,172.28 USDT}\end{align}

 

\begin{align}\small\textsf{Cross Margin Bankruptcy Price (Short)}= {{\textsf{2000} \times \textsf{5000}} \over {\textsf{5000(1 + 0.005 - 0.01} + {\textsf{2000} \times \textsf{0.00075} \over \textsf{2,172.28}}) - {\textsf{0.2}\times\textsf{2000}}}}≈\textsf{2,183.86 USDT}\end{align}

Bankruptcy Price

All orders have a bankruptcy price in addition to the liquidation price. When the market price reaches the bankruptcy price, it indicates that the margin of the position is equal to zero. If the final execution price of the position is higher than the bankruptcy price, the balance remaining after the liquidation is added to the insurance fund. Conversely, if the final execution price is worse than the bankruptcy price, contract loss will occur and will be covered by the insurance fund.

 

Isolated Margin Bankruptcy Price (Long)

$$ \small\textsf{Isolated Margin Bankruptcy Price (Long)} = {{\textsf{Avg. Entry Price} \times \textsf{Leverage}} \over \textsf{Leverage + 1}} $$ 

 

Isolated Margin Bankruptcy Price (Short)

$$ \small\textsf{Isolated Margin Bankruptcy Price (Short)} = {{\textsf{Avg. Entry Price} \times \textsf{Leverage}} \over \textsf{Leverage - 1}} $$ 

 

Cross Margin Bankruptcy Price (Long)

\begin{align}\small\textsf{Cross Margin Bankruptcy Price (Long)} = {\textsf{1.00075}\times\textsf{Quantity}\over{{\textsf{Quantity}\over\textsf{Avg. Entry Price}}+ \textsf{Available Balance}}}\end{align}  

 

Cross Margin Bankruptcy Price (Short)

$$ {\small \textsf{Cross Margin Bankruptcy Price (Short)} = {0.99925\times\textsf{Quantity}\over{{\textsf{Quantity}\over\textsf{Avg. Entry Price}} - \textsf{Available Balance}}}} $$

Liquidation Process

The liquidation process for isolated and cross margin is as follows.

 

Isolated Margin Liquidation Process

1. When the Mark Price reaches the liquidation price, the position is taken over by the liquidation engine.
   
   
2. The liquidation engine takes the position and liquidates the position to the bankruptcy price.
   
   
3. Reduce risk limit and carry out liquidation process step by step.
   
   

Note) The liquidation engine tries to prevent contract losses by closing the position at the bankruptcy price. However, in volatile or non-liquid markets, the position may be closed at a price worse than the bankruptcy price. In the event of such contract loss, the insurance fund will primarily act to prevent the loss, and if the insurance fund has insufficient funds, the position will be handled through auto deleveraging.

 

Cross Margin Liquidation Process

Cross margin secures margin to delay liquidation in the following ranks. The position is liquidated when all four steps are progressed.

• #1 Available Balance
• #2 Reduce Risk Limit Level
• #3 Cancel all Active Orders in the same direction
• #4 Cancel all Active Orders in other directions

 

 

Minimizing Liquidation

Dual Price Mechanism

The dual price mechanism is a system that protects traders from malicious price manipulation by setting the mark price as the trigger for the liquidations. Mark Price* is made up of the global spot price index* and funding basis rate, in other words, a real-time spot price on major cryptocurrency exchanges. This prevents unfair liquidations caused from market manipulation, lack of liquidity, or deviation of spot and futures prices.

*Mark Price: The Mark Price is made up of the global spot price index and funding basis rate, in other words, a real-time spot price on major cryptocurrency exchanges. 

$$ \small\textsf{Mark Price} = {\textsf{Index Price}\times \textsf{1+Funding Basis}} $$

*Funding Basis: Variable representing the precedence of the futures market over the movement of the spot market. Thus, the difference between the spot and the futures price

$$ \small\textsf{Funding Basis} = {\textsf{Current Funding Rate}} \times {\textsf{Time until Funding} \over \textsf{Funding Interval}} $$

※Note: In a highly fluctuating market, the Last Traded Price on MCS may temporarily deviate from the Mark Price. Traders must ensure to pay attention to the Liquidation Price and the Mark Price interval to prevent unnecessary liquidations.

In addition, MCS provides systematic features to prevent liquidations.

 

Adjusting Margin and Leverage

Traders can minimize their risk by adjusting their position's leverage and margin. As shown below, margin can be added to the position from the 'Position Tab' to widen the gap between the liquidation price and mark price.

To add or remove margin, click the pencil icon. Enter the amount of margin to add and click confirm. In order to remove margin, click the remove tab and follow the same procedure. 

 

Stop-Loss Order

Stop-loss orders are automatic trade orders given by the trader to trigger a close when a certain price(loss) level is reached to minimize losses. Traders can set a simple close position strategy at the point of position entry. If the trader desires to close the position partially or with a limit order, the conditional order can be used to place a stop loss limit order. The stop-loss order price is set against the market price (last/mark/index).