What Is the Concept of “Liquidity Risk” as It Relates to Leveraged Derivatives?

Liquidity risk is the danger that a leveraged position cannot be quickly and efficiently unwound (sold or closed) without significantly impacting its price. If a market becomes illiquid, a prime broker may be forced to liquidate a client's leveraged position at a much worse price than anticipated.

This can lead to larger losses for the client and potential losses for the broker.