Liquidation is the forced closing of a leveraged position once its collateral falls below the minimum required to keep it open. The venue's margin engine executes this automatically, closing the position at whatever price the market offers and charging a liquidation fee for the service. It happens without warning at the moment the maintenance threshold is crossed, which is why understanding the mechanics ahead of time matters more than reacting to it after the fact.
Every leveraged position has two margin levels: the initial margin required to open it, and a lower maintenance margin that must be held to keep it open. As price moves against the position, unrealized losses eat into the collateral. Once remaining equity drops to the maintenance level, the position is liquidated, regardless of whether the trader is watching. This is a structural feature of collateralized leverage; every leveraged position on every venue works this way.
The liquidation price is the price at which unrealized losses exactly consume the margin down to the maintenance threshold. It depends on the entry price, the leverage used, and the maintenance margin requirement for that specific asset. Higher leverage compresses the distance between entry and liquidation because a smaller notional cushion is available per unit of margin. Two positions of identical notional value but different leverage will liquidate at very different prices, the higher-leverage position triggers first.
A trader opens a $10,000 notional long at 10x leverage, posting $1,000 in margin. Assume the maintenance margin requirement is 3% of notional, or $300. The position can absorb losses up to $700 (the $1,000 margin minus the $300 maintenance floor) before liquidation triggers, which corresponds to roughly a 7% adverse move on the $10,000 notional. Doubling the leverage to 20x on the same $10,000 notional halves the margin to $500, leaving only $200 of loss absorption above the same $300 floor, a move of about 2% instead of 7%. The maintenance requirement itself doesn't change with leverage; what changes is how much margin sits above it.
Liquidation is triggered off the mark price, an index-derived reference price. This matters because a thin order book can produce a brief, wild price print that doesn't reflect the broader market; if liquidation triggered off that print directly, a single manipulated trade could force out positions that were never genuinely underwater. Tying liquidation to an index-based mark price insulates the mechanism from that kind of single-venue distortion, though it doesn't eliminate risk during genuine, broad market moves.
Closing a liquidated position isn't free. Canborsa charges a 0.5% liquidation fee on the position, on top of whatever losses had already accumulated, deducted from the remaining collateral. This fee exists because a forced close still requires execution, and it's structured to discourage using liquidation as a substitute for actively managing an exit. It is meaningfully larger than the 0.14% round-trip fee paid on a position that's closed voluntarily, which is itself a reason to close before liquidation.
A long position liquidates on the way down, once price falls far enough to exhaust the margin. A short position liquidates on the way up, for the mirrored reason. Both work off the same maintenance-margin mechanic; only the direction of the triggering move differs. This matters when comparing risk across a portfolio that holds both longs and shorts, each side has its own liquidation price sitting at a different distance depending on its own leverage and entry.
A cluster of positions opened at similar prices and similar leverage tends to share similar liquidation levels. When price reaches that shared level, multiple positions close in a short span, and on a long-heavy market those forced closes are forced sales, adding downward pressure exactly as price is already falling. This is the mechanism behind a liquidation cascade, and it's the reason a sharp move can accelerate well past what the initial catalyst alone would explain, the market's own leveraged positioning becomes part of the move itself.
Not every liquidation closes the entire position at once. Some venues close only enough of a position to restore the account to a healthier margin level, leaving the remainder open. A partial liquidation still charges the liquidation fee on the portion closed and still reflects the same underlying cause, insufficient margin relative to the position's size, but it leaves the trader with a smaller, better-collateralized position.
A handful of concrete actions widen the distance to liquidation: adding margin to an open position increases the cushion without changing the notional exposure; reducing the position size directly lowers the notional at risk; and choosing lower leverage from the outset keeps the liquidation price farther from entry in the first place. A voluntary stop set well ahead of the calculated liquidation price hands control of the exit to the trader instead of to the margin engine, and avoids the 0.5% liquidation fee entirely.
Liquidation is the automatic, forced closing of a position once its collateral falls to the maintenance margin level. The venue's margin engine executes the close and charges a liquidation fee, separate from and larger than the standard round-trip trading fee.
The liquidation price is the level at which unrealized losses consume the position's margin down to the maintenance threshold, based on entry price, leverage used, and the maintenance requirement for that specific asset. Higher leverage sets that price closer to entry.
The margin engine closes the position at the prevailing mark price, deducts a 0.5% liquidation fee from the remaining collateral, and the position ceases to exist. It happens automatically and without prior warning once the maintenance threshold is crossed.
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