Forced liquidation is the execution side of liquidation: the sequence the exchange runs when a position no longer meets its margin requirement. Understanding the sequence helps explain why liquidations arrive so fast and why they move the market.
01The sequence
First, the risk engine values the position against the mark price. Second, it compares account equity with the maintenance margin for that position's size tier. Third, if equity is short, the position ownership passes to the engine, in most systems at the bankruptcy price. Fourth, the engine sends the closing order to the market, as a taker order, immediately.
Many exchanges attempt partial liquidation first on large positions, closing just enough to bring the margin ratio back above maintenance. If that fails or the tier is already deep, the whole position goes.
02Fees and who pays them
A liquidation fee is charged to the liquidated trader, commonly 0.5% to 1.75% of notional at retail margin tiers. Part of this fee funds the exchange insurance fund, which covers cases where the close executes worse than the bankruptcy price. In fast markets that happens often, and it is the reason insurance funds exist.
03Why forced liquidation moves price
Every forced close is a market order. A long liquidation is a sell, a short liquidation is a buy. When many fire at once the book burns through levels, the mark price jumps, and the next batch of positions fails its margin check. That feedback is the anatomy of a cascade, and it is visible event by event in our recorded feed.