In margined trading, liquidation is a venue-controlled reduction or closure of exposure when required collateral support is insufficient. It is a risk-management action, distinct from voluntarily closing a trade or a company’s insolvency proceedings.
What can trigger it
Losses, falling collateral values or higher maintenance requirements can push a position or account past its risk threshold. Many derivatives venues use a mark price or an account-level margin measure rather than the latest trade alone.
The process may cancel orders, reduce part of a position or close it fully. The sequence and treatment of remaining collateral depend on the product and margin mode. Liquidation need not wait until the trader’s entire original deposit is lost.
Why the displayed price is not the whole outcome
A liquidation trigger is different from the price at which exposure is actually handled or executed. Market gaps, liquidity, fees and the venue’s takeover rules can affect the final result.
Insurance funds or auto-deleveraging mechanisms, where present, address specific system shortfalls under their own rules. They do not guarantee reimbursement of a liquidated trader’s losses. A stop-loss order also does not guarantee execution before liquidation, especially if the two use different trigger prices.