What Is a ‘Liquidation Fee’ and How Is It Determined?
A liquidation fee is a charge applied to a trader's position when it is liquidated by the exchange's risk engine. This fee is typically a small percentage of the notional value of the liquidated position.
The fee covers the cost of the liquidation process and, crucially, a significant portion of it is directed to the exchange's insurance fund. The exact percentage is set by the exchange and varies based on the margin system and asset.
Glossar
Liquidation Process
Process ⎊ The liquidation process, within cryptocurrency, options, and derivatives, represents the enforced conversion of assets into cash to satisfy outstanding obligations, typically triggered by margin calls or insolvency events.
Liquidation Fee Structure
Solvency ⎊ The fee assessed during a forced liquidation is a critical component of the exchange's risk management framework, designed to absorb potential losses from market slippage when closing an under-margined position.
Crypto Futures
Product ⎊ Crypto futures are standardized, exchange-traded contracts obligating the holder to buy or sell a specific quantity of a cryptocurrency at a predetermined price on a specified future date.
Liquidation Fee
Mechanism ⎊ A liquidation fee, within cryptocurrency derivatives and options trading, represents a cost incurred when a leveraged position is forcibly closed by an exchange due to insufficient margin maintenance.
Margin System
Collateral ⎊ The margin system, across cryptocurrency derivatives, options, and traditional financial instruments, fundamentally relies on collateralization.
Notional Value
Scale ⎊ Notional Value refers to the total market value of the underlying asset controlled by a derivatives position, calculated by multiplying the contract size by the current market price, irrespective of the actual margin capital posted.