Liquidations

When trading USDT perpetuals, it is essential to maintain sufficient margin to avoid liquidation. If your equity falls below the required margin thresholds, the exchange initiates a structured liquidation process involving Liquidity Support Providers (LSPs), the Insurance Fund, and Automatic Deleveraging (ADL).

When Will Liquidation Occur?

Liquidation is triggered if the margin in your subaccount drops below the maintenance margin. The initial margin is the collateral required to open a position. The maintenance margin is typically half of the initial margin.

Formula:

Maintenance Margin = Position Value × Maintenance Margin % If Equity < Maintenance Margin → Liquidation begins.

The Liquidation Process

Liquidity Support Providers (LSPs)

When a subaccount falls below the maintenance margin, the exchange first attempts liquidation by passing the position to LSP participants. LSPs are professional market makers and funds that agree to absorb liquidated positions at favorable prices. Positions are transferred in chunks to reduce market disruption. LSPs purchase liquidated positions at Mark Price ±1% spread, ensuring they are compensated for taking on risk.

Insurance Fund

If the liquidated account balance is insufficient to cover losses, the Insurance Fund fills the shortfall. The Fund ensures LSPs receive positions at the agreed Mark Price +1% and protects the system from negative balances.

Automatic Deleveraging (ADL)

If LSPs and the Insurance Fund cannot fully absorb the liquidation, the exchange uses ADL. In ADL, profitable positions from other traders are automatically reduced or closed against the liquidated position. Traders with high leverage and profits are prioritized for ADL, meaning their positions may be partially reduced.

Example

Initial Position

Trader A opens a long position of 10 BTC at $30,000. Position Value = $300,000. Collateral = $15,000. Maintenance Margin Requirement = 5% × $300,000 = $15,000.

Market Movement

BTC price falls to $28,000. New Position Value = 10 × $28,000 = $280,000. Unrealized PnL = $280,000 − $300,000 = −$20,000. Equity = Collateral + PnL = $15,000 − $20,000 = −$5,000.

Result

Required Maintenance Margin = 5% × $280,000 = $14,000. Equity (−$5,000) < $14,000. Liquidation is triggered.

Process

Step 1: Exchange sells part of the position (5 BTC) to LSPs at Mark Price −1% = $27,720. Step 2: Insurance Fund covers a shortfall of $6,400. Step 3: Remaining 5 BTC is closed via ADL, matched against profitable shorts from other traders.

Key Takeaways

• If your equity falls below maintenance margin, liquidation begins immediately.

• LSPs absorb liquidated positions at Mark Price ±1% spread.

• The Insurance Fund covers shortfalls to protect the system.

• If needed, ADL reduces profitable traders’ positions to balance risk.

For more details on Liquidations on the Arkham Exchange, see our technical documentation:

https://arkm.com/docs#liqudations