How Does Market Depth Influence the Setting of Risk Limits?

Market depth, which is the volume of buy and sell orders at various prices, is a critical factor. In markets with low depth, a large liquidation order is likely to cause significant slippage.

Exchanges set lower risk limits (and thus lower maximum position sizes) in low-depth markets to prevent a single liquidation from creating a massive, fund-draining deficit.

What Is ‘Slippage’ and How Does It Relate to Liquidation Deficits?
How Does a Large “Order Book Depth” Help to Mitigate Slippage?
What Is ‘Market Depth’ and Why Is It Important for Large Trades?
How Does Market Depth Influence the Potential for Slippage?
Can a Trader Declare Bankruptcy to Avoid Margin Call Deficits?
Why Are Stop-Loss Orders Less Effective in Low-Liquidity Cryptocurrency Markets?
When Is a Large Market Order More Likely to Cause Significant Slippage in a Cryptocurrency Pair?
How Does the Risk Limit System Help Prevent Fund Depletion?

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