What is liquidation?

Liquidation is the process in which a platform reduces or closes positions under its rules when an account or position no longer meets collateral or other risk requirements. It can reduce part of a position or end the whole position. Platform risk rules trigger it without requiring the trader to submit another closing order.

What triggers liquidation?

Leveraged trading uses margin as collateral. Including unrealized results on open positions produces equity; the platform then determines the eligible equity recognized as collateral. Maintenance margin is the minimum collateral required to keep a position open.

Adverse price moves, fee payments or falling collateral values can reduce eligible equity. When equity cannot cover maintenance requirements and applicable fees, the platform enters risk handling under its rules. An unrealized loss changes the equity valuation; it need not already be a transaction deducting cash from the balance.

For example, OKX’s contract rules use the mark price, a reference calculated under platform rules, for risk valuation rather than only the last trade. Account modes also determine which assets and positions enter the calculation; see margin.

Why can liquidation occur before all margin is lost?

Keeping a position open requires collateral to remain. The platform does not wait until equity reaches zero to address risk.

For example, in a hypothetical state excluding fees, eligible position equity is 5 USDT and the maintenance requirement is also 5 USDT. They are already equal: equity remains, but there is no surplus above the requirement. USDT is the denomination asset. Actual triggers also include product-specific fees and threshold conditions.

Using current position and account conditions, one can estimate the price at which liquidation may be triggered: the estimated liquidation price. It changes with equity and positions and is not a guaranteed execution level. Its derivation is explained in that entry.

How does a platform handle insufficiently collateralized positions?

The aim is to reduce position risk until remaining collateral meets requirements, or end positions that can no longer be maintained. OKX’s staged handling explanation, for example, includes:

1. Cancel capacity-reserving orders: at the relevant risk stage, cancel some unfilled orders and release unnecessary reservations. This does not reverse executed positions.
2. Reduce part of the position: close some quantity under the rules, then recalculate maintenance requirements and equity for the remainder. Further reductions can stop if requirements are met again.
3. Continue closing: if collateral remains insufficient, continue handling until rules are satisfied or the position is fully closed.

Actual steps and thresholds depend on the product. Advance notice or time to add margin cannot be assumed. Orders executed in the market also face available buy and sell quotes and quantities; final execution prices can differ from the trigger reference.

Closed quantities do not automatically return if the market later rebounds. After a partial close, the remaining position continues to generate gains or losses.

How are liquidation costs and excess losses handled?

Liquidation can incur trading fees, liquidation fees or other rule-based handling costs. They affect final remaining equity. Product rules determine the applicable items and calculation bases.

With fast price changes, closing losses can exceed collateral available for the position, leaving a loss shortfall, commonly called a negative-equity shortfall. An applicable insurance fund may address some shortfalls under its rules. This differs from refunding the trader’s lost margin.

Product-defined risk conditions can also activate auto-deleveraging (ADL): the system selects opposite-side positions under its rules, matches them with positions being handled, and reduces quantities on both sides. This can affect counterparties not being liquidated for insufficient collateral themselves. Activation is not determined solely by whether a fund balance is zero.

How do liquidation, stop-loss and expiry settlement differ?

All three can end a position, but for different reasons. Liquidation follows collateral or other risk conditions; a stop-loss follows a trader’s preset exit condition; expiry settlement follows the contract’s expiry rules.

After a stop-loss condition is met, a subsequent order must still be submitted and executed. Setting a stop-loss does not guarantee completion before liquidation. Expiry settlement applies to dated contracts, not handling insufficient collateral. See expiry futures for the mechanism.

Which assets can liquidation affect?

The scope first depends on collateral allocation. Isolated margin usually allocates collateral separately to a specified position; cross margin shares collateral within defined limits, so other assets and positions can participate in risk calculations.

For example, OKX’s relevant contract explanation applies isolated handling to margin allocated to that position. Cross handling can involve shared trading-account margin; funding-account assets are outside the deduction scope described there. Automatic margin additions, fees and negative-balance handling still require product-specific checks. One account mode’s outcome is not a universal platform loss limit.

Related terms

Explore margin, estimated liquidation price and insurance funds, or return to the crypto glossary.

References

• OKX: Liquidation FAQ
• OKX: Liquidation mechanism
• OKX: Auto-deleveraging mechanism