How Exchanges Handle Position Liquidations: A Brief Overview

Liquidation procedures vary widely across crypto exchanges.

This article provides an overview of the most popular ones.

Full, Immediate Liquidation

• Your position is transferred to the liquidation engine at its bankruptcy price.

Duration: 0 seconds.

Time: Immediately after your liquidation price is hit.

Result: -100% equity.

Fees: No fees. You simply lose all of your equity.

Partial, Immediate Liquidation

• 1. An Immediate or Cancel order is submitted by the liquidation engine, on your behalf. The order is 10% of your position size (or some other percentage, depending on the exchange).
• 2. If the order is filled, and your position (now reduced in size by 10%) satisfies the minimum maintenance margin requirements, the position exists liquidation. If not, the position is fully liquidated at its bankruptcy price.

Duration: 50 ms to 1 second.

Time: Immediately after your liquidation price is hit.

Result: -1% to -100% equity.

Fees: An additional fee may be charged on the orders submitted by the liquidation engine.

Partial, Gradual Liquidation

• 1. An Immediate or Cancel order is submitted by the liquidation engine, on your behalf. The order is 10% of your position size (or some other percentage, depending on the exchange).
• 2. If the order is filled, and your position (now reduced in size by 10%) satisfies the minimum maintenance margin requirements, the position exists liquidation. If not, repeat step 1–2.

Duration: 100 ms to 10 minutes.

Time: Immediately after your liquidation price is hit.

Result: -1% to -100% equity.

Fees: An additional fee may be charged on the orders submitted by the liquidation engine.

Other things to note

• For all liquidation processes, open orders are automatically cancelled. Some exchanges may only cancel orders on the trading pair that you are liquidated on (generally requires isolated margin to be enabled).
• Some exchanges charge an additional fee on orders submitted by the liquidation engine. The fee ranges from the regular taker fee (e.g. 0.05%) to a much higher fee (2%).
• Most, if not all, exchanges automatically prevent you from submitting new orders yourself, while the liquidation process is active. Your account is effectively in read-only mode (although for some exchanges, the read-only mode will be limited to the trading pair that you were liquidated on).

Conclusion

Your equity is best protected with a partial, gradual liquidation.

A full, immediate liquidation essentially guarantees that you lose 100% of your equity. There is zero recourse, once you are liquidated.

Whilst a partial, gradual liquidation provides the same degree of loss in the worst case, the best case (single order, no more than 10% of position size) is significantly more favorable to the trader:

• If the liquidation order is filled at the bankrupcty price of the position, the trader will incur a total loss of 10%. This only happens in extreme circumstances, during a very fast moving market, or due to a complete lack of liquidity.
• If the liquidation order is filled at the market price, at the time of liquidation, the loss will be even smaller (depending on slippage and fees, it could be as low as 0.1%). This is what happens on most liquid venues during periods of regular volatility.

In any case, the best case loss is significantly smaller than the loss a trader would be subjected to under a full, immediate liquidation, making a partial, gradual liquidation the preferred choice of liquidation for the trader (but not necessarily for the exchange!).

Fees on liquidation orders should always be taken into account when choosing between venues with partial liquidation, as some venues might charge exorbitant liquidation fees that effectively eliminate all the benefits of partial liquidation.