The liquidation engine aims to execute the closing trades at or better than the position’s Bankruptcy Price. This is critical: any execution price above the bankruptcy price means there was some collateral left over after closing. Any price worse than bankruptcy means the account would go negative (a shortfall). The engine will try to avoid the latter. In practice:
  • If the position can be closed above the bankruptcy price, the account will have some equity left (which is contributed to the Insurance Fund as explained below).
  • If the position closes exactly at bankruptcy, the account equity will be zero.
  • If it had to close below bankruptcy (avoiding this is the goal, but say the market dropped too fast), the account would go negative – in that case the negative portion is a shortfall that the Insurance Fund must cover.
  • The difference between the actual close price and the bankruptcy price determines if there is excess or deficit. Excess margin from a favorable liquidation (close price better than bankruptcy) is taken to the Insurance Fund. Any shortfall (close worse than bankruptcy) is absorbed by the Insurance Fund to bring the account to zero.
Once the liquidation process finishes, the trader’s position is closed. The trader’s account balance is adjusted – in most cases it will be zeroed out or left with a small residual. The trader will be notified of the liquidation event. All further handling of any loss beyond collateral is managed by the Insurance Fund and possibly ADL (see below).