What Is a Liquidation in the Context of a Leveraged Derivatives Trade?
Liquidation is the forced closure of a leveraged position by the exchange or broker due to the trader's collateral (margin) falling below a required maintenance level. This happens when market losses erode the margin, and the trader fails to add more funds.
The liquidation process is designed to prevent the trader's account balance from going negative and to protect the exchange's solvency. In highly volatile markets, liquidations can cascade, accelerating price movements.
