What Market Conditions Are Most Likely to Cause a Liquidation Deficit?

Liquidation deficits are most likely to occur during periods of extreme market volatility and low liquidity. A sudden, massive price swing can cause the price to 'gap' or move too quickly for the liquidation engine to execute the closing order at the bankruptcy price.

In illiquid markets, the liquidation order itself can push the price further, resulting in a poor execution price that leads to a deficit, which the insurance fund must then cover.