Definition
Liquidation is a venue's forced reduction or closure of a leveraged position after the account no longer satisfies its maintenance margin requirement.
What triggers liquidation
A derivatives venue compares account equity with the maintenance margin required for its open positions. The calculation can include collateral, unrealized profit and loss, position size, margin tiers and other positions sharing the same collateral.
Many perpetual futures venues use a mark price rather than the latest trade price for this calculation. This reduces reliance on a single short-lived trade.
What happens during liquidation
The venue may close part or all of the position. Partial liquidation can restore the required margin while preserving the remaining position. If ordinary execution cannot restore the account, a backstop or insurance mechanism may take over the remaining exposure.
The trigger price and the actual execution price can differ because liquidation orders still encounter market liquidity and price movement.
What it does not mean
Liquidation is the risk-control process. A liquidation threshold is the condition that makes an account eligible for that process. A liquidation price is an estimate of the mark price at which the condition may be met.
Where this term fits
Questions about liquidation
- Does liquidation always close the entire position?
- No. Some venues first reduce part of a position and close the remainder only if the account still fails its maintenance requirement.
- Does liquidation happen at the last traded price?
- It depends on the venue. Hyperliquid and several other derivatives venues use a calculated mark price as the trigger.
- Can liquidation affect other positions?
- Yes, under cross margin. With isolated margin, the effect is generally limited to the collateral and position inside that isolated allocation.
See these concepts in context
Review the Fensory MCP connection, tools and account controls.