Assignment of unfilled liquidations
Currently, because Kraken Futures has no insurance fund to deal with unfilled liquidations and because it is bad client experience to simply break off open interest of profitable traders to offset poorly collateralised traders, we have developed an alternative model to accommodate liquidity provision in high volatility periods.
Liquidity providers (LPs) are willing to take the risk of receiving unfilled liquidations. The benefit is the maintenance margin remaining from the marked value of the position, which compensates for the risk.
Participation in the Position Assignment System (PAS) works as follows:
- Each LP who wants to participate in the scheme can provide a maximum position that they are willing to be assigned in one single order, or a maximum position size that they are wiling to have AFTER an assignment has occurred(or both)
- Each LP has a certain amount of available margin (AM) at any given time, so if AM < MT (max threshold) they do not assume their max threshold but only up to the available.
- Upon assignment, it shows in the websocket feed for Fills and we send an email outlining the parameters of the position they assumed.
- As a last resort, if a liquidation can neither be filled in the book or assigned by the LPs participating in the PAS, then unwind occurs.
The sum total capacity of liquidity providers participating in the program is a de facto insurance fund that provides protection against extreme volatility leading to system losses.
This solution allows us to continue not to require clawbacks and have realtime settlement of profits.
Position Assignment System Logic
There are numerous factors that influence how the assignments are disbursed among Liquidity Providers (LPs) in the PAS
- Members of the Assignment program are all treated equal. When a liquidation occurs that cannot be filled by the order book, the total shares available for assignment are split equally between all active Liquidity Providers.
- Although all accounts are treated equal when assigning shares, the benefits of setting a higher max preference to receive assignment shares can still be seen in the distribution of assigned shares, if you are more able to receive more assignments in general (i.e., keeping sufficient margin to take opportunities), this will make you a more reliable provider and gives you the capability to receive a higher share.
- I.e if 500,000 contracts of FI_BTCUSD (whatever type) was assigned between 10 LPs (with 5 LPs set to max_position = 25,000 and the other 5 LPs set to max_position = 100,000), then firstly the liquidation assignment would be split equally between the 10 accounts at 50k. However as the first 5 accounts have a maximum of 25k, they would receive their max limits. This means that the remaining 125k that spilled over would be split between the other accounts.
Below is a direct description of the process:
- Mark price for a contract or contracts changes, valuing positions at new amount.
- Liquidation occurs on margin account level (e.g., FI_BTCUSD) when position values fall below maintenance margin requirement.
- Assignments occur on a per contract basis (e.g., FI_BTCUSD_150618).
- We refer to the unfilled liquidation for a specific contract by U.
- We refer to the set of Liquidity Providers whose general preferences are satisfied by P.
- We allocate U among P according to their risk preferences.
- Repeat the following process until U has been entirely allocated or P is empty.
- If P is empty and U has not been entirely allocated, then the remainder is terminated, with corresponding drop in open interest.
Check out an Example of how an Assignment unfolds in our system.
The decimal and thousands separators shown in this article may differ from the formats displayed on our trading platforms. Review our article on how we use points and commas for more information.