How Does the Liquidation Risk in the Futures Leg of a Basis Trade Impact the Strategy?

Liquidation risk is the primary threat to a leveraged basis trade. If the market moves against the short futures position (e.g. a sharp price rise in a long spot/short futures trade), the futures account could be liquidated.

This breaks the market-neutral hedge, leaving the trader with an unhedged long spot position and a realized loss on the futures. The strategy's success relies on maintaining both legs until convergence.