Perpetual futures markets often behave differently from spot markets, particularly during periods of volatility. Sharp price moves, sudden changes in liquidity, and rapid liquidation events are often interpreted as evidence of unfair or manipulative behaviour.

In practice, many of these outcomes arise from the interaction between leverage, margin rules, liquidation mechanisms, and liquidity provision. This article examines how those components interact, and why the resulting market behaviour is often predictable once the underlying mechanics are understood.

Understanding these dynamics requires us to look beyond individual trades, and instead focus on how the market functions as a system.

Why liquidations cluster and cascade

Liquidations in perpetual futures markets often cluster around similar price levels. This is not accidental. Many traders use similar leverage levels and enter positions at obvious technical points, such as visible trend reversals, breakout levels, or consolidation patterns.

This can result in large numbers of positions with liquidation thresholds concentrated within a narrow price range. When the market moves a few percent toward those levels, liquidations may be triggered across a range of positions in quick succession.

These forced closures introduce additional market orders into an already moving market, which can push prices further in the same direction, triggering further liquidations and creating a cascade. During periods of heightened volatility, order books also tend to thin, further amplifying this effect.

Although these cascades can look coordinated and feel unfair, they are a structurally predictable outcome of leverage, shared positioning, and automated risk controls. Tools such as liquidation heat maps exist precisely because these patterns repeat and follow identifiable structural behaviour.

Liquidity & Market Makers

When traders buy or sell perpetual futures contracts, the process appears simple. Orders execute instantly at visible bid and ask prices. However, that liquidity does not appear by accident.

While some orders come from retail and institutional traders, the majority of resting liquidity on both sides of the order book is provided by market makers. Market makers are firms whose role is to continuously quote buy and sell prices, allowing other participants to trade when they want to.

All centralised exchanges, from the smallest to the largest, rely on market makers. Without them, markets would be intermittent and fragile, and liquidity would frequently disappear on one side of the book during directional moves, making it difficult to buy when prices are rising or sell when prices are falling.

Market makers are not directional traders. They do not attempt to predict whether prices will rise or fall. Instead, they quote on both sides of the market simultaneously and manage the resulting exposure through hedging, position limits, and continuous repricing of their quotes.

Buying contracts creates long exposure. Selling contracts creates short exposure. Market makers manage this inventory risk by adjusting prices, reducing size, and encouraging offsetting flow when conditions change.

Why spreads widen during volatility

During periods of elevated volatility, the risks faced by market makers increase. Prices move faster, hedging becomes both more expensive and less reliable, and order books thin as some participants step back.

To compensate, market makers widen spreads and reduce the size of their quoted orders. This is not an attempt to disadvantage traders, it is a defensive response to increased risk.

This behaviour is often described as “liquidity being pulled”, but in reality, market makers that fail to adjust during volatile conditions may appear to be providing stability, but they expose themselves to losses that are unsustainable. Over time, this reduces liquidity rather than preserving it.

Reducing exposure during stress is not evidence of coordination or bad faith. It is a necessary survival mechanism in leveraged markets.

Conclusion

Many features of perpetual futures markets that are perceived as unfair or manipulative are better understood as the result of leverage, liquidity provision, and automated risk controls interacting at scale. The way margin, liquidation, and liquidity are designed has a direct impact on price behaviour, volatility, and trader outcomes.

In the next article, we will look at participant behaviour and examine the most common misunderstandings in perpetual futures markets.