What is liquidation?
Margin ratio is an indicator used to estimate the users’ assets risk. When margin ratio less than or equal to 0%, forced liquidation will be triggered.
Margin Ratio = (Equity Balance / Used Margin) * 100% - Adjustment Factor
Note: Used Margin = Position Margin + Frozen Margin
What’s adjustment factor?
Adjustment Factor is used to prevent the system's margin call losses. Huobi DM uses tiered adjustment factor mechanism which will go alive officially after delivery and settlement on HT time July 19, 2019. The adjustment factor is divided into 3 tiers according to net position. The higher the net position and tier go, the more risk of the account will become.
Taking the adjustment factors of BTC contract as an example. According to the table below, if a use has 1000 BTC perpetual swaps contracts in open interest, the adjustment factor for 10 leverage multiple, 20 leverage multiple and 5 leverage multiple is 12.5%, 25% and 6% correspondingly.
【The above data and indicator contents may be adjusted in real time according to market conditions, and the adjustments will be made without further notice.】
What is Estimate Liquidation Price?
The estimate liquidation price is the estimated market price when the margin ratio is equal to or less than 0. Please note that this price is for reference only. The real-time liquidation price should refer to the last order price when the margin ration goes to 0.
An exponential moving average (EMA) is a type of moving average (MA) that places a greater weight and significance on the most recent price movement.
To reduce the risk of forced liquidation, Huobi DM uses EMA (Exponential Moving Average) as another reference price in liquidation mechanism. To determine whether liquidation is triggered or not, the system will refer to the margin ratios calculated according to both the last price and the EMA. When the two margin ratios both go to or below 0, liquidation will be triggered. By referring to both most recent EMA and last price for liquidation, it can help users to avoid liquidations due to abnormal market fluctuations in uncontrollable situations.
The most recent EMA = ( the latest market price – the last EMA ) * smoothing factor + the last EMA
EMA will be calculated in every 5 seconds;
the smoothing factor = 1 / 3
Assuming P1 = 8000; P2 = 7988; P3 = 7981, then:
EMA1 = P1 = 8000；
EMA2 = ( P2 - EMA1 ) * Smoothing Factor + EMA1 = ( 7988 – 8000 ) * 1 / 3 + 8000 = 7996；
EMA3 = ( P3 - EMA2 ) * Smoothing Factor + EMA2 = ( 7981 – 7996 ) * 1 / 3 + 7996 = 7991；
Note: PN refers to the most recent EMA at the Nth period.
What is liquidated order price?
The liquidation price is the market price for reference when the margin ratio is equal to or less than 0%. When the margin ratio reaches to or below 0%, liquidation will be triggered and the trading system will take over the positions with a limit order price. Since the taken-over positions won’t go through the match system, the price of the taken-over positions will not display on the market (K-line chart). Please note that the liquidated order price is different from the liquidation price.
Examples on the concept above:
Xiao Ming has 2BTC in account equity. He opened long 1000-lot BTC perpetual swaps contracts at the price of 8000USD/BTC(100USD/lot). Assuming there was 10X in leverage, 12.5% in adjustment factor and no corresponding transaction fees as well, what will happen to Xiao Ming’s positions when the last BTC perpetual contract reaches 6982.75 USD?
Let’s have a look the calculation for different elements：
- Unrealized Profit and Losses
- According to the order direction-open long, the formula is Unrealized P/L for long position= (1 / Average position price – 1 / last order price) * order quantity * contract face value
- Therefore, the calculation for Xiao Ming’s Unrealized P/L is: (1 / 8000 - 1 / 6982.75) * 1000 * 100 = -1.821BTC
- In this case, when the price of BTC perpetual swaps contract reaches 6982.75 USD, Xiao Ming’s unrealized profit and losses is -1.821BTC
- Xiao Ming’s account equity
- Formula: Equity = Deposit + realized profits / losses this period + unrealized profits / losses this period
- Xiao Ming’s equity is 2 + 0 + ( -1.8210) = 0.179BTC
- Therefore, when the price of BTC perpetual swaps contract reaches 6982.75USD, Xiao Ming’s account equity is 0.179BTC
- Position Margin
- Formula: Position Margin = ( Contract Value * Position Quantity ) / Last Order Price / Leverage
- Xiao Ming’s position Margin is ( 100 * 1000 ) / 6982.75/ 10 = 1.4321BTC
- Therefore, when price of BTC perpetual swaps contract reaches 6982.75, Xiao Ming’s current position margin is 1.4321BTC
- Is liquidation triggered？
- Formula: Margin Ratio = (Equity Balance / Used Margin ) * 100% - Adjustment Factor
- Xiao Ming’s margin ratio is ( 0.179 / 1.4321 ) * 100% - 12.5% = 0
- In this case, the EMA price according the EMA formula is 6982.72
- As explained above, when the margin ratios calculated according to both the last price and the EMA go to or below 0, Xiao Ming’s order will be liquidated.
- Therefore, Xiao Ming’s order is liquidated when the price of BTC perpetual swaps contract reaches 6982.75USD.
- What will happen after liquidation？
- As mentioned above, when liquidation is triggered, the trading system will take over the order with a limit order price when the account equity goes to 0.
- In this case, trade system will take over Xiao Ming’s order with limit order price when his account equity goes to 0. The limit order price is also Xiao Ming’s liquidated order price.
- The liquidated price: assuming the liquidated price is X, according to the formula above, the calculation of the liquidated order price is ( 1 / 8000 - 1 / x ) * 1000 * 100 = -2BTC
- X= 6896.55
- Therefore, the liquidated order price of Xiao Ming’s order is 6896.55USD when the account equity goes to 0. The 6896.55USD is also the position price of the taken-over orders which will not display on market chart.
（Please note that the information above is for example reference only. Please refer to the official announcement on Huobi DM for timely updates.）
Insurance fund is set up to cover the societal losses (i.e. losses attributed to unfilled liquidated orders) or to settle incidents in contracts trading.
For each digital asset contract, there is a corresponding insurance fund, and the same digital asset contracts of different periods share one insurance fund.
The sources of insurance fund are mainly from Huobi DM and the premiums after forced liquidations. Once forced liquidation triggered, the system would take over users’ positions and close them by placing orders on order book. The premiums generated by liquidated positions will be injected into corresponding insurance fund. In terms of initial trade or under special situations, system will manually transfer the premiums (generated by liquidated positions) into exchange account, supplementing insurance fund.
Use of insurance fund: During the settlement period of each cycle, if there were margin call losses attributed to unfilled liquidated orders, system would first use insurance fund to meet the losses. Clawback will only occur if the insurance fund is not enough to cover the system's total margin call losses.
When the market fluctuates severely, the user is subjected to liquidation, and the transaction cannot be concluded at the liquidation price, resulting in loss greater than the margin, the platform will adopt the “clawback” system. Clawback will only occur if the insurance fund does not have enough funds to cover the system's total margin call losses.
Full account clawback system
The system's total margin call losses
If system's losses + insurance fund >= 0, then clawback rate = 0
If system's losses + insurance fund <0, then clawback rate = (system losses + insurance fund) / net profit across all contracts
Clawback coefficient = System's losses / Profit across all contracts
At the time of settlement, the BTC perpetual swaps had a totally loss of -120 BTC.
First fill it with risk reserves, if there is still a loss of -20BTC after filling. It needs to be allocated from the BTC contract profit account.
Assuming all the profits of the profitable account are 400000BTC, the allocation factor is 20/400000 = 1/20000
The perpetual swaps of an account made a total of 2BTC in this period, the amount to be allocated for this account is 2 * (1/20000) = 0.0001BTC.
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