In simple terms
In leveraged trading, liquidation is the closing or reduction of a position imposed by a broker, exchange, or risk system because the available capital no longer meets its requirements.
It is not the ordinary case in which a trader chooses to exit at a loss. The full Liquidation entry explains initial margin, maintenance margin, liquidation price, and differences between venues.
What happens
When collateral falls below a threshold, the trader may receive a margin call or the position may be reduced automatically. Rules, order priority, fees, and protections vary by instrument and intermediary; they should be checked before using leverage.
Liquidation protects the venue's risk controls, but it does not guarantee the customer an exact execution price or always prevent a negative balance. In a fast market, execution may occur beyond the displayed threshold.
Sources
- FINRA Rule 2264, Margin Disclosure Statement — states that a firm may sell assets and that a customer may remain responsible for a deficit.
- CME Group, Performance Bonds/Margins FAQs — describes the function and adjustment of derivatives margins.