Under what circumstances will the perpetual contract be forced to close?

Forced liquidations occur when a trader's account margin becomes insufficient, funding payments are unmet, or when extreme market volatility disrupts the exchange's ability to find counterparties.

Oct 22, 2024 at 11:54 am

Understanding Perpetual Contract Forced Liquidations

1. Margin Exhaustion

When the available margin in a trader's account drops below the required margin for their open positions, a forced liquidation will occur. This happens because the exchange needs to protect itself from potential losses if the market moves against the trader's position.

2. Insufficient Funding

If a trader cannot meet the funding payments required for a perpetual contract, a forced liquidation may be initiated. Funding payments are necessary to maintain the fair value of the contract and ensure the market's stability.

3. Negative Account Balance

If a trader's total account balance becomes negative (i.e., they owe more money to the exchange than they have available), the exchange will liquidate their open positions to cover the deficit.

4. Market Volatility

Extreme market volatility can lead to forced liquidations if the price of the underlying asset moves too quickly against the trader's position. In such situations, the exchange may struggle to find counterparties to unwind the position, resulting in a forced liquidation.

5. System Malfunctions

Rarely, system malfunctions can trigger forced liquidations. These can occur due to technical glitches, network issues, or other unexpected errors that disrupt the exchange's operations.

6. Regulatory Intervention

Government agencies or exchanges may initiate forced liquidations in certain situations to protect investors or maintain market stability. This could happen in cases of suspected market manipulation or illegal activities.

7. Exchange Discretion

In certain circumstances, exchanges may use their discretion to force liquidate a trader's positions even if the conditions described above are not met. This is usually done to protect the exchange from potential risks or conflicts of interest.

Preventing Forced Liquidations

To avoid forced liquidations, traders should:

• Maintain sufficient margin in their accounts
• Monitor their positions and adjust accordingly
• Manage their risk exposure by using stop-loss orders
• Understand the implications of funding payments
• Be aware of potential system malfunctions and regulatory interventions