What Is a Liquidation Fee? How Much Exchanges Charge

A liquidation fee is a penalty charged by an exchange when your position is forcibly closed because your margin balance can no longer cover your losses. It's separate from trading fees — it's extracted specifically at the moment of liquidation.

Why It Exists

Exchanges don't close underwater positions out of goodwill. Liquidating a large position in a fast-moving market carries real execution risk. The fee compensates for that and funds the exchange's insurance pool — a reserve that covers losses when the liquidation engine can't close your position at or above the bankruptcy price.

What Exchanges Actually Charge

Fee structures vary more than most traders realize:

- **Binance**: ~0.5% of notional position size on liquidation, with an insurance fund exceeding $1B - **Bybit**: Liquidation fee varies by tier and margin mode, typically 0.5-1.5% of remaining margin - **OKX**: Similar fee structure to Binance, 125x max leverage - **Hyperliquid**: Charges the taker fee rate on liquidation rather than a fixed penalty. Liquidation proceeds flow to the HLP (Hyperliquidity Provider) vault

On most centralized exchanges, the fee is 0.5-1.5% of the remaining margin at the time of liquidation — not your original position size, but what's left.

Insurance Funds and ADL

When your position is liquidated, the exchange's engine takes it over and attempts to close it in the market. If the fill price is worse than your bankruptcy price — meaning the exchange loses money closing it — the insurance fund absorbs the difference.

If the insurance fund runs dry (rare, but it happened on early BitMEX), the exchange triggers **ADL (Auto-Deleveraging)**. The most profitable traders on the opposite side of your trade get their positions partially closed, absorbing your loss. Most traders never experience ADL, but it's why some platforms show an ADL indicator on open positions.

DEX Liquidations Work Differently

On pool-based DEXes like GMX and Jupiter, liquidation fees flow to liquidity providers (LPs) who take the other side of all trades. On Hyperliquid, the fee goes to the HLP vault. There's no centralized insurance fund — the protocol's LP pool absorbs the risk.

How to Avoid Paying It

Use a stop-loss placed well above your liquidation price. A stop at 5% loss on a 10x position costs you 50% of your margin — expensive, but the liquidation fee on top of a full wipe is worse.