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Perpetuals Trading Series: How EQONEX deals with liquidation

January 22, 2021
As we explained in the previous sections in this guide, an account is only able to send new orders as long as its Total Account Margin is higher than the Initial Margin required for all open positions and open orders. As soon as the Total Account Margin drops below the Initial Margin, the account can no longer send any new orders unless such order would reduce the existing position (e.g. a sell order, when the current position is long). To continue adding positions (e.g. add buy orders, when the current position is long), the trader will have to transfer additional funds that can be used for margin to their wallet, close open orders, or close open positions.

The Total Account Margin includes any (un)realized P&L and thus, if the market moves against the position such that the P&L on the position is negative, the Total Account Margin will reduce. When the Total Account Margin falls below the Margin Liquidation Trigger, the account will start to get liquidated. This means that EQUOS will take over your positions and try to unwind them by either attempting to sell, if the position to be liquidated is long, or attempting to buy, if the position to be liquidated is short. 

Examples 

Trader A, let’s call her Clare, has 10 BTC Perpetuals marked at 10,000 USDC, such that her Notional Position is 100,000 USDC. We know, from the previous example, that the Initial Margin requirement for a 100,000 USDC position is 1,562.50 USDC. Assume Clare has 1,750 USDC deposited in her wallet. She has not made any P&L as she has only just executed the trade, and there are no open orders. Her Total Account Margin is 1,750 USDC which is higher than the Initial Margin required of 1,562.50 USDC. Therefore, Clare can continue to send more orders if she wants to. 

Example 1 

When a loss reduces the Total Account Margin below the Initial Margin Before Clare sends another order, however, the mark price of the EQUOS BTC Perpetual future reduces to 9,950 USDC. Clare’s Notional Position is now 10 x 9,950 USDC = 99,500 USDC. Clare has thus lost 500 USDC on their position. Therefore, her Total Account Margin = 1,750 - 500 = 1,250 USDC. Because the Notional Position has changed, the Initial Margin now is 1,552.50 USDC and the Margin Liquidation Trigger is 776.25 USDC. As the Total Account Margin is now below the Initial Margin, Clare can no longer send any new orders. The account is not yet liquidated, as the Total Account Margin is still higher than the Margin Liquidation Trigger. If Clare wants to send more orders, she will have to deposit additional funds that are eligible for margin. 

Example 2 

When a loss reduces the Total Account Margin below the Margin Liquidation Trigger The mark price of the EQUOS BTC Perpetual reduces further to 9,900 USDC. Clare’s Notional Position is now 10 x 9,900 USDC = 99,000 USDC, and she has lost 1,000 USDC in total on her position. Her Total Account Margin is 1,750 - 1,000 = 750 USDC The Initial Margin required for a 99,000 USDC Notional Position is 1,542.50 USDC, and the Margin Liquidation Trigger is at 771.25 USDC. Because the Total Account Margin has fallen below the Margin Liquidation Trigger, EQUOS will start to liquidate Clare’s position. 

Zero Price

The Zero Price is the point where the Total Account Margin would be fully depleted. An account that gets liquidated is charged a liquidation fee which will be taken from the account’s margin balance. The Zero Price is adjusted to reflect the liquidation fee to ensure sufficient funds remain in the account to pay this fee upon liquidation. 

Fees

Any order that is executed as a result of a liquidation is charged a liquidation fee of 0.375% on the order size executed, at the price at which the liquidation order was (partially) filled. No trading fees will be charged to the account for this transaction. The liquidation fee will be paid to EQUOS’ Liquidation Reserve. A trader on EQUOS can never lose more than their Total Account Margin. However, there may be occasions where a liquidation order cannot be filled above the Zero Price. In other words, the liquidation is loss making. As long as it is able to do so, the Liquidation Reserve will cover these losses. We’ve written a more detailed blog post on how liquidations work.


Liquidations at EQUOS

EQUOS has unique features and functionality explicitly dedicated to managing liquidation orders. By using three lines of defense we aim to minimize the likelihood of Auto-DeLeveraging (ADL). Although EQUOS aims to minimize the chances of such an event, it should be noted that the risk of ADL can never be completely removed. EQUOS aims to prevent the possibility of ADL using the following 3 functions: 

1. Liquidation Platform - a dedicated liquidity pool exclusively used for liquidation. We invite market makers to join the Liquidation Platform in order to add greater depth and provide price competition to ensure that liquidation orders are executed at the market price for the account holder. 

2. EQUOS order book - if there is no liquidity available at the Zero Price or better on the Liquidation Platform then orders will be sent to the main EQUOS order book. 

3. Liquidation Reserve - if there is not enough liquidity on the EQUOS order book then the Liquidation Reserve will take the position at the Zero Price. It should be noted that the Liquidation Platform is only accessible to participants invited to join that process. 

Step 1: Liquidation Platform

When a position needs to get liquidated, the risk engine first sends an order to our Liquidation Platform with a limit price based on the Zero Price. Quotes in the Liquidation Platform are hidden. The Liquidation Platform prices can only be filled by liquidation orders, never by regular market orders. If the order can be filled in full the account is liquidated at this price and the liquidation is now complete. If the order is completed above the Zero Price then any excess funds, after fees are charged, are retained by the account holder. If the order was not fully filled, the liquidation moves to step 2. 

Step 2: Our own Order Book 

If the order could not be filled in full in the previous step, the remaining order size is sent to the main order book with the same limit at the Zero Price. If the remaining order size can be absorbed here then the liquidation is complete. If the order is completed above the Zero Price then any excess funds, after fees are charged, are retained by the account holder. 

Step 3: Liquidation Reserve

If there is still an outstanding balance after step 2 or if the portfolio was already in negative equity before step 1 (for example due to a sudden jump in prices) then this position is transferred to the Liquidation Reserve at the Zero Price. Any losses beyond the Zero Price, in other words, any negative margin balances, will be absorbed by the Liquidation Reserve. This step is conditional on the capital base at the Liquidation Reserve being sufficient to be able to manage the risk of the positions. 

Step 4: Auto Deleveraging

If a liquidation order cannot be filled on the Liquidation Platform or the public order book and the liquidation reserve is not able to absorb any additional risk, then the positions that need liquidation must be closed out against other open positions on EQUOS. This process is called auto deleveraging (ADL). The exchange will only enter ADL if the Liquidation Reserve is depleted to the point that no further risk can be absorbed into the fund. EQUOS has taken a market standard approach to ADL based on profitability and leverage. Positions are ranked based on their P&L percentage and effective leverage. In the case that EQUOS needs to liquidate portfolios through ADL, higher leveraged and more profitable positions are matched first. This process continues until all liquidation orders are filled. 

Examples

The EQUOS BTC Perpetual future is marked at 10,000. A long position of 50,000 USDC (5 BTC Perpetuals) needs to get liquidated. Its Zero Price, adjusted for the liquidation fee, is 9,900 USDC.

Example 1:  Liquidation order gets filled in the Liquidation Platform and the Main Order book 

Step 1: Liquidation Platform

The liquidation engine sends a sell order for 5 BTC Perpetuals to the Liquidation Platform with a limit at 9,900. The following bids are available in the Liquidation Platform: 

• 2 BTC at 9,950 

• 0.5 BTC at 9,910 

• 10 BTC at 9,899 

Because the limit price is set to 9,900, the liquidation order can only be filled at a price of 9,900 USDC or above. Therefore, it is able to fill 2.5 BTC on the Liquidation Platform. The remainder, 2.5 BTC, remains open. 

Step 2: Main Order Book

The liquidation engine now sends a sell order for the remaining 2.5 BTC Perpetuals to EQUOS’ main order book, again with a limit at 9,900. The following bids are available in the main order book: 

• 2 BTC at 9,920 

• 1 BTC at 9,900 

• 5 BTC at 9,880 

The liquidation engine is able to fill the remaining order of 2.5 BTC on the main order book, so the liquidation is now complete. The account is charged the liquidation fee of 0.375% on the notional of the liquidation. In this case, as the order was filled at various prices: Liquidation Fee = 0.375% * (2 x 9,950 + 0.5 x 9,910 + 2 x 9,920 + 0.5 x 9,900) = 186.17 USDC As the liquidation order was largely filled above the Zero Price, and the Zero Price is already adjusted for the liquidation fee, there will be some margin left in the trader’s account. This will be for the trader to keep. 

Example 2:  Liquidation order cannot be filled on the Liquidation Platform or the Main Order Book 

Step 1: Liquidation Platform

The liquidation engine sends a sell order for 5 BTC Perpetuals to the Liquidation Platform with a limit at 9,900. The following bids are available in the Liquidation Platform: • 2 BTC at 9,900 • 10 BTC at 9,899 Because the limit price is set to 9,900, the liquidation order can only be filled at a price of 9,900 USDC or above. The liquidation engine is thus able to fill 2 BTC on the liquidation platform.

Step 2: Main Order Book

The liquidation engine now sends a sell order for the remaining 3 BTC Perpetuals to EQUOS’ main order book, again with a limit at 9,900. The following bids are available in the main order book: • 2 BTC at 9,899 • 5 BTC at 9,880 As there are no bids available at or above the limit price, the order cannot be filled on the main order book.

Step 3: Liquidation Reserve

The remaining liquidation order of 3 BTC is sent to the Liquidation Reserve, who will take the position at a price of 9,900 USDC as long as its capital base is sufficient to manage the risk of the positions. The account that was liquidated is charged the liquidation fee, which will be paid to the Liquidation Reserve. The trader does not have any margin left in his account.


Download the full perpetuals guide from the EQUOS Archives homepage. 

Trade perpetuals here: EQUOS.io.

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