Liquidation Price Slippage

Liquidation price slippage occurs when the market price moves so rapidly that an automated engine cannot execute a liquidation at the intended price. In thin markets, the size of the position being liquidated can move the price against the engine, leading to a worse execution than expected.

This discrepancy between the bankruptcy price and the actual execution price is a primary source of deficit that insurance funds must cover. High slippage increases the risk of the insurance fund being depleted during extreme volatility.

Managing this requires sophisticated execution algorithms that can slice large liquidation orders into smaller, market-neutral pieces. It is a fundamental challenge in maintaining orderly markets during liquidations.