What is the automatic liquidation mechanism of CoinEx contract?

Understanding the Basics of CoinEx Contract Trading

CoinEx offers a contract trading platform that allows users to trade with leverage, enabling traders to open positions larger than their actual account balance. This type of trading involves risks, especially when market conditions move against an open position. To mitigate excessive losses and maintain system stability, CoinEx employs an automatic liquidation mechanism, which plays a crucial role in risk management.

When a trader opens a leveraged position on CoinEx, they are required to maintain a minimum amount of collateral (margin) in their account. If the value of this margin drops below a certain threshold due to adverse price movements, the system initiates the liquidation process automatically. This ensures that the exchange does not bear the burden of negative balances caused by user losses.

How Liquidation Works on CoinEx Contracts

The automatic liquidation mechanism is triggered based on two key metrics: maintenance margin rate and bankruptcy price. The maintenance margin rate refers to the minimum percentage of margin that must be maintained relative to the total position size. When the available margin falls below this level, liquidation begins.

Another important concept is the bankruptcy price, which is the price at which a trader’s entire margin would be wiped out if the market moves unfavorably. Once the mark price approaches or reaches this bankruptcy price, the system initiates liquidation to close the position before it becomes insolvent.

Liquidation is executed through a liquidation engine, which attempts to close the position using the best available price in the order book. If the market lacks sufficient liquidity, the system may partially or fully liquidate the position depending on real-time market depth.

Different Types of Liquidation on CoinEx

There are two primary forms of liquidation on CoinEx contracts:

• Partial Liquidation: In this scenario, only a portion of the open position is closed to bring the margin ratio back above the maintenance level. This typically occurs when there is enough market liquidity to absorb part of the position without causing significant slippage.

• Full Liquidation: If the market conditions are volatile and the remaining margin is insufficient to sustain even a partial closure, the system will completely close the position. This results in the loss of the entire margin allocated to that trade.

Both types aim to protect the integrity of the contract market while minimizing systemic risk for other participants.

Role of Insurance Fund in Managing Liquidations

To handle situations where liquidation prices do not cover the full loss (e.g., due to extreme volatility or slippage), CoinEx maintains an insurance fund. This fund acts as a buffer to absorb any shortfall from unsuccessful liquidations. It is funded by a portion of trading fees and profits from successful liquidation trades.

In cases where a position is liquidated but the execution price results in a negative balance, the insurance fund covers the deficit, preventing the exchange from suffering financial loss. Traders who are liquidated do not owe additional funds beyond their initial margin.

However, the insurance fund is not infinite, and in rare cases of massive liquidations during extreme market events, CoinEx may resort to auto-deleveraging (ADL) as a secondary safeguard.

Auto-Deleveraging (ADL) as a Backup Mechanism

If the insurance fund is insufficient to cover losses from liquidated positions, CoinEx activates the auto-deleveraging system. ADL reduces the exposure of profitable traders by forcibly closing or reducing their positions proportionally based on their profitability and leverage.

This mechanism ensures that the overall system remains solvent without requiring external capital injections. Affected traders under ADL receive compensation based on the reduction ratio, preserving fairness in the redistribution process.

Traders can monitor their ADL ranking in real time on the CoinEx platform. A higher ranking indicates a greater likelihood of being selected for deleveraging if necessary.

How to Avoid Liquidation on CoinEx Contracts

To prevent liquidation, traders should adopt several risk management strategies:

• Monitor Margin Ratio Closely: Keeping track of the initial and maintenance margin requirements helps avoid unexpected liquidation triggers.

• Use Stop-Loss Orders: Setting stop-loss orders near critical support/resistance levels limits downside exposure.

• Avoid Overleveraging: High leverage increases the probability of liquidation. Using moderate leverage improves trade longevity.

• Add More Margin Dynamically: Users can manually increase their margin allocation to improve the position's health factor.

By understanding how the liquidation engine works, traders can better manage their risk exposure and optimize their contract trading strategy on CoinEx.

Frequently Asked Questions (FAQs)

Q: Can I recover funds after a liquidation?A: No, once a position is liquidated, the margin used to secure the trade is lost. However, if the liquidation is executed successfully, no further debt is incurred.

Q: Does CoinEx notify me before liquidating my position?A: Yes, CoinEx provides liquidation warnings when your margin ratio approaches the maintenance level. These alerts appear on the trading interface and may also be sent via email or push notifications.

Q: How is the mark price determined during liquidation?A: The mark price is calculated using a combination of internal data and external index prices to ensure fair valuation and prevent manipulation. It serves as the reference for determining liquidation status.

Q: Is there a way to check my liquidation price before opening a position?A: Yes, CoinEx displays the estimated liquidation price in real time before you confirm a trade. This feature allows traders to assess risk levels before committing capital.