In recent years, there has been a boom in contract trading, with almost all platforms launching contract trading sections to cater to the increasing number of investors participating in the “contract” trend.
However, the frequent extreme market conditions resulting from consecutive turmoil have led to the phenomenon of “network disconnections” and “price manipulation” that often occur on certain platforms. The market is filled with chaos, forced liquidations, and malicious manipulation, causing a lack of protection for user rights. This has led to significant biases in industry awareness and barriers in choosing contract products, and investors have become more cautious when entering the market. Taking these factors into consideration, 4E has made risk control mechanism design a top priority during the development of contract products.
Since the launch of 4E contracts, despite experiencing numerous extreme market conditions, there have been no incidents of price manipulation or system crashes. This is attributed to 4E’s adherence to the development philosophy of “long-termism” and its consistent values of “doing no harm,” as well as its strong risk control capabilities.
In the contract market, many platforms have a history of sudden abnormal fluctuations in order book prices leading to user liquidations, commonly known as “price manipulation.”
This phenomenon is related to insufficient liquidity and imperfect risk control mechanisms on most trading platforms. The most direct factor is the use of unreasonable liquidation prices. For example, many immature platforms use the latest transaction price in the contract market as the price benchmark, which is one-dimensional and easily manipulated by large funds.
We know that the price of a contract depends on the spot price of the underlying asset. Ideally, the price of the contract (latest price) should follow the trend of the spot price of the underlying asset. However, this is not always the case because the contract has its own order book and supply and demand dynamics, which often result in differences between the contract price and the spot price of the underlying asset. If the latest transaction price in the contract order book is adopted, it can be easily manipulated.
In response to this, 4E contracts use the mark price as the trigger for forced liquidation. Compared to the latest contract price, the mark price has less short-term volatility, which allows for a better estimation of the “true” value of the contract. This helps prevent unnecessary forced liquidations caused by abnormal market fluctuations, effectively avoids malicious market manipulation by large traders, protects small and medium-sized traders in the market, and ensures market stability. This mechanism is considered to be at the forefront of the industry and has gained recognition and trust from 4E contract traders.
The mark price formation of 4E is derived from the weighted average of corresponding spot quotations from multiple platforms. It is calculated by combining the index price with the funding rate basis difference and the depth-weighted mid-price. It has the characteristics of diverse price sources, rigorous and transparent calculations, and can effectively smooth out prices, thereby avoiding unnecessary forced liquidations and the risk of cascading liquidations.
In other words, the liquidation price depends on the result of multiple price mechanisms weighted. In extreme market conditions, if large traders with an advantage in funds want to manipulate the real-time market price of a contract maliciously, controlling the latest price is not enough. They also need to control the mark price, which poses a significant challenge in terms of risk and cost, making the probability of this happening extremely low.
Furthermore, 4E contracts have strict limitations on user positions, order quantities, and opening and closing prices to prevent market manipulation.
In terms of position limitations, 4E implements a tiered maintenance margin system. When the account equity exceeds a certain range, the initial margin for opening a position will change. The larger the position, the higher the required margin and the lower the leverage ratio. The tiered maintenance margin system reduces the risk of large positions and maintains the stability of the contract market without affecting ordinary users.
4E contracts also impose limitations on user order quantities to prevent situations where large orders cause market crashes.
In addition, the limit order mechanism is one of the important risk control measures to prevent market manipulation and protect users. 4E contracts impose price limits on user orders for different currency contracts.
In terms of liquidation mechanisms, 4E adopts a partial liquidation process to reduce risk limits and reduce the demand for maintenance margin, thus avoiding the complete liquidation of all positions.
When the mark price reaches the liquidation price displayed in the position range, the liquidation system will take over the trader’s position. After taking over the position, the liquidation engine will first determine the current level of margin used.
If it is taking over a position with the minimum level of margin, the system will cancel all outstanding orders for this contract. If the maintenance margin requirement is still not met at this point, the position will be taken over by the liquidation engine at the bankruptcy price.
If it is taking over a position with the second or higher level of margin, the system will cancel any outstanding orders for the contract but keep the existing position to reduce the margin level for the user. If the requirements are still not met, the system will either execute the entire order or cancel it immediately. The value of this order is equal to the difference between the current value of the position and the margin level that meets the current margin requirement, thus avoiding further liquidation. Finally, if the position is still in a state of forced liquidation, it will be taken over by the liquidation engine at the bankruptcy price.
The entire liquidation process is divided into three steps. When the position has sufficient initial margin to meet the maintenance margin requirement, the system will stop the liquidation.
This mechanism implemented by 4E not only more effectively prevents users from being liquidated in one go, but also reduces the impact of excessive liquidation orders on the market, greatly helps users reduce liquidation risks, and maximizes the retention of user positions and equity.
Since its launch, as a leader in the contract market, 4E has been committed to protecting the interests of investors and continuously improving contract details. Under the strict risk control system, 4E has gained the trust of users, with trading volume continuing to climb and gaining recognition from numerous investors.
