A perpetual futures contract does not liquidate against the price on its own order book. It uses an index assembled from several external venues, and the two figures routinely disagree.
The order book can be moved
Liquidation triggered by a venue's own last traded price would create an obvious incentive: push the book far enough to force liquidations, then profit from the resulting cascade.
Thin books make this cheap, especially outside active hours or on contracts with modest open interest. The manipulation cost can be far below the liquidation value unlocked.
Using an external composite breaks the link. Moving one venue's book no longer moves the number that decides whether positions close.
How the composite is built
Index methodologies name a set of constituent spot exchanges and combine their prices, usually by median or by weighting according to volume.
Rules define what happens when a constituent fails: feeds that go stale, deviate beyond a threshold or stop responding are dropped and the remaining sources are reweighted.
These rules are published because traders need to know what their positions actually settle against, and the composition changes over time as venues are added or removed.
Mark price smooths the index further
Many venues do not liquidate against the raw index either. They compute a mark price that combines the index with a funding component or a moving average.
The purpose is to prevent a momentary index spike from closing positions that would have survived seconds later, given that liquidation is irreversible.
Smoothing has a cost. Positions that genuinely should close remain open slightly longer, which increases the chance a shortfall reaches the venue's insurance fund.
Why the basis is not an error
The gap between the contract's traded price and the index is the basis, and it reflects positioning rather than a pricing mistake.
Persistent demand for leveraged long exposure lifts the contract above the index, and funding payments then flow from longs to shorts to pull it back.
Basis therefore carries information about how the derivatives market is positioned, which is not visible in the spot price alone.
Consequences for traders
A position can be liquidated while the venue's visible price appears safe, because the index moved on exchanges the trader was not watching.
The reverse also happens: a violent wick on the local book leaves positions untouched, since the index never confirmed the move.
Reading a contract specification therefore means reading its index constituents and mark price formula, since those determine the price that actually governs the position.