Liquidation and Margex anti-liquidation protection

In margin trading, liquidation is an automatic procedure that occurs if a trader's margin is no longer sufficient to cover further losses from a position. If a position reaches its liquidation point, the trade will be immediately closed at market, i.e liquidated.

Liquidation may occur at different margin thresholds, depending on the margin type used in a trade - Cross or Isolated.

01

Cross margin positions and liquidation. Cross Margin Level

For Cross-margin positions, liquidation occurs if Cross-Margin Level drops to or below 10%:

cross margin level (2).png

The Cross Margin Level indicators provides traders with an easy way to keep track of cross margin trades, without having to manually perform all of the related calculations. The gauges will fill up as more margin is pulled into a cross-margin trade. A green indicator reflects a sufficient level of available margin remaining, while a red indicator means that available margin is at a critical level and the position may be at risk of liquidation. Liquidation may occur if Cross Margin Level drops to 10% or below.

Essentially the Cross Margin Level indicators provide the following information in an easy to understand format:

  • As more margin is pulled into a trade, the gauge will fill up accordingly
  • Liquidation occurs if cross margin level drops to or below 10%
  • If cross margin level is below 100%, it will not be possible to open new positions using the corresponding margin currency
02

Estimated liquidation price calculations for Isolated Margin

For Isolated margin positions, an Estimated Liquidation Price is automatically provided. This reflects the estimated price level at which a position will be liquidated, due to a trader’s margin no longer being sufficient to cover further losses if the market moves against the trade:

20est liq price.png

It is important to keep in mind that the EST. liq. price is an estimated value based on the available margin remaining in a trade. This means that the estimated liquidation price of an isolated-margin position can change. This can occur when:

  • Funding is charged for carrying a position into a new funding rollover
  • Adding/removing margin to/from a position (see Deleveraging)
  • Change in Multiplier during extreme market volatility (see Anti-liquidation protection: Multiplier)

If a position reaches its liquidation point, the trade will be immediately closed at Market.

General formulas for calculating the Estimated liquidation price:

Liq Price (Long) = OpenPrice - (Margin - OpenOrderCommission - CloseOrderCommission - Funding) / SizeInBTC * OpenPrice

Liq Price (Short) = OpenPrice + (Margin - OpenOrderCommission - CloseOrderCommission - Funding) / SizeInBTC * OpenPrice

where, OpenOrderCommission is:

Maker Fee 0.1% for LIMIT orders Taker Fee 0.2% for MARKET orders

and CloseOrderCommission is: TakerFee 0.2%

In such calculations, trade fee fractions are rounded up for ease of understanding.

EXAMPLE of calculations of liquidation price (for Limit Order):

OpenOrderCommission = SizeBTC * MakerFee = 0.01 * 0.001 = 0.00001 BTC CloseOrderCommission = SizeBTC * TakerFee = 0.01 * 0.002 = 0.00002 BTC

For LONG deals:

  • Liq Price (Long) = OpenPrice - (Margin - OpenOrderCommission - CloseOrderCommission - Funding) / SizeInBTC * OpenPrice
  • Liq Price (Long) = 10000 - (0.0001 - OpenOrderCommission - CloseOrderCommission - 0.01 * 0) / (100 * 0.0001) * 10000 = 10000 - (0.0001 - 0,01 * 0,001 - 0,01 * 0,001 - 0.01 * 0) / 0.01 * 10000
  • Liq Price (Long) = 9930.0

For SHORT deals:

  • Liq Price (Short) = OpenPrice + (Margin - OpenOrderCommission - CloseOrderCommission - Funding) / SizeInBTC * OpenPrice
  • Liq Price (Short) = 10000 + (0.0001 - OpenOrderCommission - CloseOrderCommission - 0.01 * 0) / (100 * 0.0001) * 10000 = 10000 + (0.0001 - 0.01 * 0.001 - 0.01 * 0.002 - 0.01 * 0) / 0.01 * 10000
  • Liq Price (Short) = 10070.00

EXAMPLE of calculation of liquidation price (for Market order):

OpenOrderCommission = SizeBTC * TakerFee = 0.01 * 0.002 = 0.00002 BTC CloseOrderCommission = SizeBTC * TakerFee = 0.01 * 0.002 = 0.00002 BTC

For LONG positions:

  • Liq Price (Long) = OpenPrice - (Margin - OpenOrderCommission - CloseOrderCommission - Funding) / SizeInBTC * OpenPrice
  • Liq Price (Long) = 10000 - (0.0001 β€” OpenOrderCommission β€” CloseOrderCommission β€” 0.01 * 0)/(100 * 0.0001) * 10000 = 10000 β€” (0.0001 - 0.00002001 - 0.00002001- 0.01 * 0) / 0.01 * 10000
  • Liq Price (Long) = 9940.00

For SHORT positions:

  • Liq Price (Short) = OpenPrice + (Margin - OpenOrderCommission - CloseOrderCommission - Funding) / SizeInBTC * OpenPrice ,
  • Liq Price (Short) = 10000 + (0.0001 - OpenOrderCommission - CloseOrderCommission - 0.01 * 0) / (100 * 0.0001) * 10000 = 10000 + (0.0001- 0.00002001 - 0.00002001- 0.01 * 0) / 0.01 * 10000
  • Liq Price (Short) = 10059.98
03

Anti-liquidation protection: Multiplier

As has already been mentioned, the estimated liquidation price for isolated-margin positions - is an estimated value calculated based on numerous factors, such as the margin reserved for the trade, trade commissions, and other factors.

However, as the price of any asset is constantly fluctuating, anytime that the price of an asset changes (i.e. anytime a trade is executed on the market by market participants), the liquidation price would also fluctuate, as the value of the reserved margin would also increase/decrease accordingly. This in turn would make it impossible to provide an estimated liquidation price for traders.

To solve this issue, Margex employs a unique Anti-liquidation protection system, which essentially locks in the estimated liquidation price for a position when opened, by means of a Multiplier value, while fully covering any related expenses, providing traders with a static liquidation level, even if the market value of the traders own margin is decreasing.

The Multiplier value is calculated as an average price of an asset over a set period of time.

An example of how the anti-liquidation protection system works:

Let's assume 1 BTC = $50,000

  • Trader opens a Long (buy) position of 1 BTC, with x10 leverage, using BTC as margin collateral

For this position, the trader has reserved 0.1 BTC of their personal funds as Margin. At the time of the opening of the trade 0.1 BTC = $5,000 This would essentially mean that the trader's current liquidation price would be $45,000

  • Let's assume that the price of BTC now drops to $48,000.

This means that the value of the 0.1 BTC margin reserved for the trade will also decrease and will be equal to $4,800, changing the liquidation price of the position from $45,000 to β‰ˆ$45,200.

On Margex, the anti-liquidation system would instead lock in the liquidation price of this trade at $45,000, even though the value of a trader's margin has decreased.

This means that a position will be able to sustain larger market movements and will not be liquidated as quickly, in case the market temporarily moves against their trade, providing traders more flexibility in terms of managing positions.

In other words, the decrease in the value of the trader's margin would essentially be fully covered by Margex's personal funds in order for the liquidation price to not move against the trade.

At the same time, it is also important to note that during large market movements and extreme market volatility the Multiplier value may change accordingly. This will cause the EST. liq. price to also change directly in accordance with the price and value of the collateral currency (and accordingly - the margin reserved for the trade), instead of remaining static.

Alternatively, stablecoins (unlike BTC and other cryptocurrencies), generally are not strongly affected by high market volatility and can be used as an alternative collateral option to fully utilize all of the benefits of the Margex anti-liquidation system while minimizing the effects of high market volatility.

04

Margex MP shield technology

The Margex MP Shield Technology protects traders from possible unnatural price movements/spikes as a result of isolated instances of price manipulation on a single exchange (liquidity provider). It monitors the accuracy of the price feed submitted by the liquidity providers and negates any suspicious trading activities such as spoofing, bluffing and wash-trading.

One of the key mechanisms which makes it possible to provide additional protection for traders through the Margex MP Shield technology is Liquidity Aggregation.

At Margex, we aggregate liquidity from a pool of liquidity providers, (12 currently) and arbitrage between them to offer the best prices across the providers (exchanges/platforms) from which liquidity is aggregated.

Additionally, besides the Margex MP Shield, liquidity aggregation also allows us to provide:

  • One of the best order book depths on the market
  • Tight spreads
  • Minimal or complete absence of slippage
  • Near-instant order execution
  • One of the lowest trade fees on the market.