Strategy 06 · Perpetuals
Liquidation Management
Distance to the engine, measured continuously.
Every perpetual position has a liquidation price: the mark price at which the venue’s engine will close it. The strategy’s job is to ensure that price is never reached. That means knowing the distance to it at all times, understanding how the engine behaves when it is reached, and acting before it does, because once the engine acts, the outcome is out of the book’s hands.
Margin and maintenance
A position is opened with initial margin and must hold maintenance margin, a smaller amount, thereafter. As mark price moves against the position, unrealised loss consumes margin until it falls to maintenance, at which point liquidation begins. The distance from current mark to that point, in price terms, is the number the strategy manages. Adding margin increases it; reducing size increases it; nothing else does.
How engines liquidate
Venues differ. Some close the whole position at market; some close it in tranches; some take it over at the bankruptcy price and unwind it themselves. If the unwind realizes less than the margin, the shortfall is met from the venue’s insurance fund. If the fund is insufficient, venues use auto-deleveraging, forcibly closing profitable positions on the other side, or socialize the loss across participants. Which of these a venue does is part of its diligence.
Acting before the engine
Wesvel manages distance to liquidation as a continuous quantity with a hard floor. When distance compresses toward the floor, the system tops up margin from pre-positioned collateral, reduces the position, or moves collateral between venues, in that order of preference and automatically. A position that cannot be kept above the floor is closed by the book, not the engine.
Practice
How Wesvel approaches it
- 01Distance to liquidation is computed continuously per position from the venue’s own mark methodology and held above a recorded floor.
- 02Collateral is pre-positioned at each venue so a top-up does not depend on a transfer arriving in time.
- 03Insurance fund depth and auto-deleveraging rules are part of venue diligence and inform position size.
- 04Positions that cannot be kept above the floor are closed by the strategy before the engine can act.
More in Perpetuals
- How Funding WorksMark price, index price and the periodic payment between longs and shorts that keeps a perpetual tethered to spot.
- Funding CaptureThe core carry position: spot in custody against a short perpetual at the venue, collecting funding with near-zero price exposure.
- Cross-Venue Funding DifferentialsHolding a long perpetual where funding is low against a short where it is high, capturing the difference with no spot leg.
- Perpetual vs. Dated BasisTrading the perpetual’s realized funding against the interest rate implied by a dated future’s premium.
- Exposure with Managed RiskHow the desk uses perpetuals to add exposure to a view it wants more of, and the sizing, margin and cost discipline that keeps leverage a tool rather than the trade.
- Venue DiligenceHow derivatives venues are reviewed before the book trades on them, and what puts one off the list.