Explanation of the Forced Liquidation Mechanism

This chapter introduces the risk control mechanisms in TBBIT contract trading, including the definition of forced liquidation, the calculation logic of the liquidation price, reasons for liquidation, as well as the Automatic Deleveraging (ADL) mechanism and the risk limit system.

Understanding the forced liquidation mechanism helps users effectively manage risks and avoid unnecessary financial losses.

1. What is Forced Liquidation

Forced liquidation refers to the risk control measure where the TBBIT system automatically closes positions when the user's account risk level is too high and the margin is insufficient to maintain the current positions.

When the account equity falls below the maintenance margin requirement, the system will trigger forced liquidation to prevent further losses or a negative balance.

Purpose of Forced Liquidation

• Prevent users from losing more than their account balance
• Control the overall risk of the platform
• Maintain stable market operation

Results of Forced Liquidation

• Current positions will be automatically closed by the system
• Users may lose their entire margin

2. Calculation Logic of the Liquidation Price

The liquidation price is the price level at which the account equity just falls below the maintenance margin, thereby triggering forced liquidation.

The calculation logic differs depending on the position direction:

Long Positions (Buying)

Forced liquidation is triggered when the price falls to a certain level.

Core Logic:
Forced liquidation occurs when losses approach or equal the margin balance.

Short Positions (Selling)

Forced liquidation is triggered when the price rises to a certain level.

Core Logic:
Forced liquidation occurs when losses erode the margin below the maintenance margin.

Main Factors Affecting the Liquidation Price

• Leverage multiplier
• Initial margin
• Maintenance margin rate
• Position size (notional value)
• Fees and funding rates (if applicable)

Key Understandings

• Higher leverage → liquidation price closer to the opening price
• Less margin → easier to trigger forced liquidation
• Larger positions → higher risk

3. Why Liquidation Happens

"Liquidation" refers to the situation where positions are forcibly closed resulting in margin loss, essentially because the margin is insufficient to cover losses.

Common reasons include:

1. Using Excessive Leverage

High leverage significantly narrows the tolerable price fluctuation range, making positions more prone to forced liquidation.

2. Market Volatility

Rapid price movements in an unfavorable direction cause the account equity to decline quickly.

3. Failure to Add Margin in Time

No margin top-up or position reduction when the account approaches forced liquidation.

4. Oversized Positions

Excessive notional value amplifies profit and loss fluctuations, increasing risk.

5. Ignoring Risk Management

Failure to set stop-losses or monitor position risks.

4. ADL (Automatic Deleveraging Mechanism)

In extreme market conditions, when forced liquidation cannot be completed at a reasonable price, TBBIT will activate the Automatic Deleveraging mechanism (ADL).

ADL is a mechanism to prevent systemic risk expansion by automatically reducing the positions of profitable counterparties in the market to hedge risks.

Trigger Conditions

• Insufficient market liquidity
• Forced liquidation orders cannot be fully executed
• Risk continues to expand

Operation Method

• The system selects counterparty positions based on a priority queue
• Positions that are profitable and highly leveraged are prioritized for reduction
• Positions are automatically matched and closed according to certain rules

Characteristics

• Not initiated by user action
• Triggered only in extreme situations
• Used to ensure system stability

5. Risk Limits

Risk limits are an important mechanism used by TBBIT to control the risk of individual accounts or positions.

The system sets different risk levels based on the user's position size, each corresponding to different margin requirements.

Functions of Risk Limits

• Limit excessively large single positions
• Prevent market manipulation risks
• Enhance overall risk control capability

Basic Logic

• The larger the position → the higher the required maintenance margin rate
• The lower the maximum allowable leverage

Impact on Users

• Users with large positions need to provide more margin
• Liquidation price may be triggered earlier
• Stricter risk management requirements

6. Summary

TBBIT's forced liquidation mechanism is an important part of ensuring the security of the trading system:

• Forced liquidation is used to control account risk
• Liquidation price reflects the risk boundary of the position
• Liquidation results from insufficient margin
• ADL is used to handle extreme market situations
• Risk limits control the risk of large-scale positions

Users should reasonably control leverage and position size, closely monitor account risk levels, and take necessary measures (such as setting stop-losses or adding margin) to reduce the risk of forced liquidation.