What Is a Liquidation Engine and How Does It Function in Perpetual Futures Exchanges?
A liquidation engine is an automated system that forcibly closes a trader's leveraged position when their margin balance falls below the required maintenance margin level. Its purpose is to prevent the trader's account from falling into a negative balance, which would create a loss for the exchange.
When a position is flagged for liquidation, the engine typically cancels any open orders for that contract and attempts to close the position at the prevailing market price. If the position cannot be closed in the market, the exchange's insurance fund or auto-deleveraging system may be activated.
Glossar
Perpetual Futures
Contract ⎊ Perpetual futures represent a type of financial derivative contract, specifically within the cryptocurrency and options trading space, that replicates the payoff of a traditional futures contract without a fixed expiration date.
Liquidation Engine
Mechanism ⎊ A Liquidation Engine within cryptocurrency derivatives functions as an automated process triggered by margin calls, designed to mitigate counterparty risk for exchanges and lenders.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.