Liquidations

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Notes:
1) While FTX aims to reduce the likelihood of clawbacks, they are still possible.
2) Estimated liquidation price is just an estimate.  When an account actually gets liquidated will depend on multiple factors including the performance of all contracts your account holds a position in, the currency your collateral is in, and other factors.
3) FTX is not offered to US customers.
4) None of this is investment advice.

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Definitions:

Term Definition Formulas
Margin Fraction (MF) Fraction of Total Account Value vs Total Position Notional in the subaccount Total Account Value / Total Position Notional

Auto Close Margin Fraction

(ACMF)

The minimum margin fraction needed to avoid the assets and positions of a given sub being liquidated via backstop liquidity providers. max( Account MMF / 2, Account MMF - 0.06 )

Zero Price (ZP)

This is the mark price (MP) that would set a subaccount’s Total Account Value to 0. Mark Price * (1 - Margin Fraction) if long, Mark Price * (1 + Margin Fraction) if short.

Position Margin Per Dollar (PMPD)

Used for calculating Position Zero Price (PZP)

[(Position maintenance collateral used) / (sum of Position maintenance collateral used for all account positions)] * Total account value / abs(position notional)

 

Maintenance collateral = Position notional * Position MMF

Position Zero Price (PZP)

The fill price a bankrupted account would receive for a particular position. MP * (1 - PMPD) if long, MP * (1 + PMPD) if short

Mark Price (MP)

Median of best bid, best ask, and last traded price (LTP).

= median(best bid, best offer, last traded price)

If futures market is paused

= index price + (LTP - index price)

 

Overview:

FTX significantly reduces the likelihood of clawbacks by using a three-tiered liquidation model:

  1. We first close positions with liquidation orders on the market
  2. We have a unique backstop liquidity provider program to reduce the impacts of liquidation on the market, therefore reducing the velocity of market fluctuations
  3. We leverage a backstop fund to prevent socialized losses

 

Step 1:

An account begins to get liquidated if its Margin Fraction is less than its Maintenance Margin.  So if its Maintenance Margin Fraction (MMF) requirement is 3%*  then it would begin to get liquidated once it became 33x leveraged. For further details on how the margin is managed on FTX please refer to the article Account Margin Management.

During liquidation,  the liquidation engine takes over and users are unable to send orders on their account. The liquidation engine will then periodically send standard limit orders in the market to close down the account's positions.  The goal of the liquidation engine is to carefully close down positions in the market while minimizing impact and keeping markets orderly.

The speed of the liquidation depends on the position size. If the liquidation of the account causes its leverage to drop back below the threshold, the liquidation ends.

Step 2:

If the account falls even closer to bankruptcy, the Backstop Liquidity Provider (BLP) system will kick in.  This happens if the account's margin drops below the Auto-Close Margin Fraction (ACMF).  So if the ACMF is 2%, then the account becomes 50x leveraged, the account will begin to close down against the backstop liquidity providers.

When an account is getting auto-closed, it will have its positions closed down at the Position Zero Price (PZP), and backstop liquidity providers will take over the positions.  A portion of the remaining collateral goes to the backstop liquidity fund.

Step 3:

If an account goes bankrupt, the backstop liquidity fund will step in to prevent socialized losses. Of note, FTX has never had a clawback / socialized losses.

 

We will now introduce a more technical explanation.

 

Step 1: On Market Liquidations

If the account’s Margin Fraction is less than account Maintenance Margin Fraction but above the Auto-Close Margin Fraction, then approximately every second we send 10% of the position size as an order in the order book with between a random price equivalent to 1 and 5 basis points through the books . We add the constraint that the total size of liquidation orders across the FTX platform for a given instrument and per liquidation cycle has to be less than the liquidation capacity set  at 0.0001 times the 7 day  Average Daily Volume of the underlying coin of the instrument. 

More specifically,very second and for each derivatives positions, the liquidation engine:

  1. Calculates initial order size as the maximum of 10% of the position size and $1000 worth of the position (i.e., max(10% position size, $1000)
  2. Caps the maximum initial order size by the total liquidation capacity remaining for that market
    1. Liquidation capacity is a global term maintained at 0.0001 times the underlying ADV over 10 seconds - where we use the 7 day average of global ADV
  3. Randomizes the order size by multiplying by a random number between 0.5 and 1.5
  4. Caps the max order size to the total remaining position size
  5. Deducts the final order size from the total liquidation capacity
  6. Places the order at a random price between 1bp and 5bps through the book, expiring on the next liquidation cycle

 

Step 2: BLP liquidations

If the account Margin Fraction is less than the Auto Close Margin Fraction, then:

Every second, we auto-close (1 - margin fraction / auto-close margin fraction) * position size, bounded below by min($1000, position size). If the margin fraction < 0, auto-close the entire position.

Backstop Liquidity Providers have a max capacity per minute and per hour.  Position is closed against BLPs in proportion to remaining capacity.  If BLPs total capacity is insufficient, the remaining size is closed against users with large opposing positions (starting with the top 10 opposing positions, more if their total is insufficient), in proportion to their position sizes. This is also known as Auto-deleveraging (ADL) and has only occurred a handful of times in the history of FTX.   

The positions on the liquidated account close at their Position Zero Price (PZP).  The BLP takes over the account at ⅔ * PZP + ⅓ * MP, but not worse than MP + MP * 10% * auto-close margin fraction.  backstop liquidity fund receives the rest--i.e. it gets ⅓*abs(MP-PZP) if the account isn’t yet bankrupt, and pays abs(MP-PZP) + 0.1 * MP * ACMF if it is.

BLP auto-closing orders do not print in the public trades channels..

If a contract hits a price band, the Mark Price is the premium as of when the circuit breaker was enacted plus the current index price.

 

Step 3: Backstop liquidity fund

Whenever an account hits the auto-close margin fraction, the backstop liquidity fund steps in.  If the account isn't yet bankrupt, then the backstop liquidity fund gains 1/3 of the remaining value of the account.  If the account is already bankrupt, then the backstop liquidity fund pays the negative value of the account (plus 10% of the auto-close margin fraction) to prevent clawbacks.

If account is bankrupt and backstop liquidity fund is empty, the remaining is taken from positions with positive unrealized pnl (proportionally to pnl). 

Customers will only have their positions ADL’d if an account hits auto-close margin fraction and the backstop liquidity providers are out of capacity.  Customers only face clawbacks if an account goes bankrupt and the backstop liquidity fund is empty, which never happened in the history of FTX and is therefore extremely unlikely to happen.

 

How can I determine my liquidation risk?

There are two ways to determine when your account would get liquidated.

#1: Estimated Liquidation Price

If you go to any market page there will be an informational box on the right hand side.  You can find an Estimated liquidation price at the bottom; if you don't have any other positions on then your position will start to get liquidated if the future's mark price gets there.

 

mceclip1.png

 

#2: Maintenance Margin Requirement

Look at the informational box on the right hand side.  You can also find your current amount of leverage used there, and your current Margin Fraction, which is just 1/leverage.  Your account will begin to get liquidated if your Margin Fraction drops below the account Maintenance Margin requirement, also displayed in the box.  Maintenance Margin Fraction starts at 3% and increases with position size, so you will begin to get liquidated if your account gets to ~33x leverage (or less depending on position size).

 

mceclip1.png

 

In the example above the user has a margin fraction of 8%:

Position size = 1 BTC * 10,406.25 $/BTC = $10,406

Total collateral = $808.73

Margin fraction = 808.73/10406.25 = 8%.

They will get liquidated  if their margin drops down to the maintenance margin requirement of 4%.  That means they'll get liquidated if markets move 8% - 4% = 4% down.

In general, the formula for estimated liquidation price should be:

Estimated Liquidation Price = Mark Price * ( 1 + Maintenance margin requirement - Total Collateral / Total Notional Size ) if you are long

Estimated Liquidation Price = Mark Price * ( 1 - Maintenance margin requirement + Total Collateral / Total Notional Size ) if you are short

Note that Total Notional Size here refers to the sum of your open position size, measured in USD, across all positions in that subaccount.  Also note that estimated liquidation prices can be unintuitive, especially if you have positions in multiple contracts.  Depend on the relative performance of different positions you hold, the actual price your account would get liquidated at might be different from your estimated liquidation price: it's impossible to show a perfect estimated liquidation price for BTC-PERP if you also have an XRP-PERP position on, because your account's margin will also depend on the performance of XRP-PERP.

 

Note that we try to liquidate accounts slowly, and we will stop if your account's Margin Fraction gets above maintenance, so we might only have to liquidate part of your position.  For more information see here. For more information on collateral, please refer to our collateral management article.

 

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* Note that (3% is the minimum MMF requirement but yours may be higher depending on the size/asset of your position)

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