How to liquidate open position when suffering loss?

[miniskull]

Hi, I'm a graduate student who doing research on Futures market. I have been looking at a lots of futures trading and clearing rules and regulations, and almost every one of them has something similar to this "When a client is default/or having the possibility of default, the brokerage firm has to liquidate the client's positions". Now, I understand that to liquidate a position mean you put in an opposite order into the system, if that order is matched, then the position is closed. But my colleague has some questions that I have not been able to find the answers for, maybe you can help me?
1. Supposedly an investor A is holding a long position and suffering a loss (meaning the future price of the index is going down)- and the margin value of A is smaller than the margin requirement and A received a margin call. A's unable to pay for it, so he/she is consider "defaulted". So his/her broker will liquidate that position by entering an opposite order (a short order). But because the market price is going down, the order book has only short order and no long order. Then how would the broker handle this situation?
2. Following the scenario in question 1, does the Clearing House/Exchange has any intervention to minimize the loss due to that investor's positions? If yes, what would be the action(s)? Does market makers get involved? If there is no market maker, what else could be used?
3. As I understand that to liquidate a position simply means to transfer that position to someone else. If the person who received that position is the Clearing House/market maker/brokerage, then every loss that receiving person suffers due to the position is the responsibility of the giving-up position investor right?

 

[ETcallhome]

Hi, I'm a graduate student who doing research on Futures market. I have been looking at a lots of futures trading and clearing rules and regulations, and almost every one of them has something similar to this "When a client is default/or having the possibility of default, the brokerage firm has to liquidate the client's positions". Now, I understand that to liquidate a position mean you put in an opposite order into the system, if that order is matched, then the position is closed. But my colleague has some questions that I have not been able to find the answers for, maybe you can help me?
1. Supposedly an investor A is holding a long position and suffering a loss (meaning the future price of the index is going down)- and the margin value of A is smaller than the margin requirement and A received a margin call. A's unable to pay for it, so he/she is consider "defaulted". So his/her broker will liquidate that position by entering an opposite order (a short order). But because the market price is going down, the order book has only short order and no long order. Then how would the broker handle this situation?
2. Following the scenario in question 1, does the Clearing House/Exchange has any intervention to minimize the loss due to that investor's positions? If yes, what would be the action(s)? Does market makers get involved? If there is no market maker, what else could be used?
3. As I understand that to liquidate a position simply means to transfer that position to someone else. If the person who received that position is the Clearing House/market maker/brokerage, then every loss that receiving person suffers due to the position is the responsibility of the giving-up position investor right?

no on #3
once the giver is closed he is flat and what ever happens to the price after that is none of his business. The rciver may be a new long or an old short closing out so in that case the contract is just simply closed.

but you need to take a look at the recent eur/chf fiasco where traders long eur/chf were expecting to be stopped out or at least auto liquidated and there were no buyers on the other side and many woke up with a negative balance.

 

[Bry]

1. As ETcallhome wrote, if the market is collapsing with panic, there might be no ask prices for a long position to liquidate; it is rare, but it happens in a panic. How does the broker handle it? They just leave an open order for client A's position to be liquidated, which would occur after the panic settled down.
2. No. A negative loss would ensue for the trader. IF the trader had an extra cushion of money, or could wire some money in, he could buy a protective option, if there was a market for that, or in the case of locked-limit, could take another month's contract (that isn't locked) on the opposite side. There could be other hedging possibilities, but they would all need more money from the trader.
3. No. Futures is "zero sum." That means if A is long (+1), when he liquidates he will exchange a contract with B, who is short (-1). Both their contracts will cancel each other's out, to create a "zero," or nothing. In this case, A lost money, and B made money.