Exchange Liquidation

Definition ∞ Exchange liquidation refers to the forced closure of a trader’s leveraged position on a cryptocurrency exchange due to insufficient margin to cover potential losses. This automatic process occurs when the market price moves adversely against the trader’s position, causing their margin balance to fall below a required threshold. It is a risk management mechanism employed by exchanges to prevent further losses and protect the platform’s solvency. Liquidations can trigger rapid price movements in volatile markets.
Context ∞ Exchange liquidation events are frequently reported in crypto news, especially during periods of high market volatility, as they can amplify price swings. The current discussion often focuses on the transparency of liquidation mechanisms and their impact on market stability. Future regulatory frameworks may impose stricter requirements on exchanges regarding margin trading and liquidation protocols to enhance consumer protection and market integrity.