What Is the Purpose of a Liquidation Engine on a Derivatives Exchange?

A liquidation engine is an automated system designed to take over and close a trader's leveraged position when their margin balance drops below the maintenance threshold. Its primary purpose is to manage the exchange's risk by preventing the trader's account from incurring a negative balance, which would result in a loss for the exchange or its insurance fund.

It ensures that the market remains solvent and positions are closed quickly to minimize systemic risk.