How Does Market Liquidity Impact the Risk of Reaching the Bankruptcy Price?

Low market liquidity significantly increases the risk of reaching the bankruptcy price. When a position is liquidated, the exchange must sell the collateral quickly.

In a low-liquidity market, a large sell order will cause significant price slippage, meaning the order is filled at a much worse price than intended. If the final execution price is worse than the bankruptcy price, a negative balance occurs, which the insurance fund must cover.