How Does the Concept of ‘Net Open Interest’ Relate to Liquidation Risk?

Net open interest is the difference between the total number of long and short contracts open on the exchange. A highly skewed net open interest (e.g. a massive long bias) increases the liquidation risk.

If the market moves adversely against the majority, a cascade of liquidations can occur, creating a large, sudden deficit that quickly drains the insurance fund and triggers ADL.