What is the automatic position-reduction mechanism?
When a user’s positions are liquidated, the remaining positions of the user will be taken over by the system. If the liquidated positions fail to be closed at the margin-call price in the market, and the insurance fund is insufficient to cover the loss, the system will trigger the automatic position-reduction mechanism. The automatic position-reduction system will reduce the positions, held by users in the reverse direction, in the sequence determined by the leverage and profitability.
The detailed sequencing formulas are:
Sequence = Profitability * Effective leverage (in case of profits) = Profitability / Effective leverage (in case of losses)
Wherein:
Profitability = Unrealized profits and losses / (Cumulative initial margins + Cumulative margins added or reduced)
Cumulative initial margins = Positions held / Average opening price
What is the difference between the automatic position-reduction mechanism and the allocation mechanism?
Under the allocation mechanism, the loss is to allocated to each profit account in proportion. Under the allocation mechanism, part of the user’s profit is transferred to cover the loss after settlement, so the profits cannot be transferred out before settlement.
Automatic position reduction is a process that allocates the losses to users with both high earnings and leverage by means of auto-deleveraging. This mechanism allocates risks by closing positions, so the profits can be transferred out at any time.
BITOY Team
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