Binance uses Mark Price to avoid unnecessary liquidations and to combat market manipulation.
Risk and Leverage are adjusted based on the customer’s total exposure; the larger the total position, the higher the required margin, and the lower the leverage. A liquidation is triggered when
Collateral = Initial Collateral + Realized PnL + Unrealized PnL < Maintenance Margin
On liquidation, all open orders are immediately cancelled. All traders will be subject to the same liquidation protocols referred to as “Smart Liquidation.” Binance avoids full clear of the user’s position whenever possible, and a precise example is listed below. For any traders that are cleared via forced liquidation and not by an order issued from the trader, a liquidation fee (0.3% on BTC/USDT perpetual contract; 0.5% on ETH/USDT and BCH/USDT perpetual contracts) will be charged on the amount liquidated only (not the notional value of the position).
All orders will be issued at the bankruptcy price on the market. If the position cannot be fully closed, the insurance fund and / or counterparty-liquidation will take effect. The insurance fund will accumulate USDT reserves based on liquidations above the bankruptcy price from the liquidation fee rate.
It is important to mention that, as a general rule, users who have less than 250,000 in open positions that enter liquidation will almost always be fully liquidated. Larger users will see a smaller percentage of their accounts liquidated compared to smaller users. This is because maintenance margin is based around a user’s position size, and not their leverage selection. As a result, for smaller users, the effective maintenance margin is lower than the liquidation fee rate, so they are already bankrupt when first entering liquidation, regardless of the final price when clearing.
Note that all orders for liquidations are Immediate or Cancel orders. The order will fill as much as possible, and cancel the rest. This is different than a Fill or Kill order which will only execute if the order can be completely executed, and will be cancelled, if otherwise. The remaining positions will be either assigned to the insurance fund or counterparty liquidated.
For all traders, the system will first cancel all open orders, then attempt to reduce the trader’s margin usage with one *single* large Immediate or Cancel order without fully liquidating the trader. If the trader is margin compliant after the order and 0.3% fee, the liquidation event is over. If the trader is still margin deficient, the insurance fund will take over the position, and the trader is declared bankrupt.
Let’s walk through a sample of how this works.
Let’s follow the 3rd scenario from the 20x leverage (default) case in the previous section. Suppose the trader starts with 1,000,000 USDT in exposure, and 50,000 in collateral, with BTC price = 10,000.
Now suppose the BTC price falls BELOW 9587. 9587 is his Liquidation Price. The trader has lost more than 41300 in unrealized pnl, so his calculation is:
958,700 in exposure, less than 8700 in collateral, with price < 9587. His maintenance margin required when he opened the positions was 8700 (see the previous example). The user is now margin deficient.
We use primarily Immediate or Cancel orders to handle liquidations. An Immediate or Cancel will attempt to fill as much of the order as possible at the given price, and cancel all remaining orders. This differs from a Fill or Kill order, as the latter will either fill all of the orders or none of it. An Immediate or Cancel order is allowed to partially fill the order.
The Immediate or Cancel (IOC) price is at the bankruptcy price. The bankruptcy price here is 9500. We will calculate the notional value to be liquidated to meet the margin requirements. An IOC order at bankruptcy price of 9500 will be issued. Some or all of the orders will be filled. At that point, a margin check will occur of the user. If the user is margin compliant, the process will end. If the user is margin deficient, the Insurance Fund and/or ADL will be involved.
The client is strongly recommended to continue manual liquidations to avoid future automatic liquidations. If the order fails to fill completely, the client’s account is declared bankrupt, value is set to 0, and the account is closed. The insurance fund and/or counterparty liquidation will take over the remaining positions.