From what I understand, you're correct. Basically the holding exchange/company does a market sell to cover their costs. Which is how we pick up cheap sats.

Liquidation usually occurs when your trade has suffered a large loss. Between 50% and 30% of your collateral defined by the Exchange used.

When this happens, the Exchange sells its collateral to cover the loss and close the trade. The trader keeps the remaining balance.

This only happens in leveraged trades where the trader borrows money from the Exchange to trade.