Auto-deleveraging (ADL)
Also called: ADL · auto deleverage
Definition
Auto-deleveraging (ADL) is a last-resort mechanism where an exchange automatically reduces profitable opposing positions to cover a liquidation that the market and insurance fund cannot absorb.
How auto-deleveraging works
Normally, when a position is liquidated, the exchange closes it in the market, and the insurance fund covers any shortfall. In extreme moves, there may be no buyers or sellers at a reasonable price and the insurance fund for that contract may not be enough. ADL then steps in.
The exchange picks traders on the opposite side of the bankrupt position and closes part or all of their positions at the bankruptcy price. Traders are ranked by profit and leverage, so those with large unrealized profit and high leverage are first in line. Many exchanges show an ADL indicator, often as lights or a queue ranking, next to each position.
ADL is rare on major pairs, but it can happen in crashes or on small, illiquid contracts. If it hits you, you are not liquidated; your profitable position is closed early, often at a decent price, but you lose the rest of the move. Rules, ranking formulas and how often ADL occurs differ by exchange.
Example
Suppose a small-cap perpetual drops 40% in minutes. A large long position worth 2 million USDT is liquidated, but the order book cannot absorb it and the insurance fund for that contract holds only 300,000 USDT. You hold a short with high unrealized profit and 20x leverage, so you rank first in the ADL queue. The exchange closes 50,000 USDT of your short at the bankruptcy price, locking in that profit but ending your trade early.
Common mistakes
- Thinking ADL is the same as being liquidated; it closes profitable positions, not losing ones.
- Ignoring the ADL indicator on highly leveraged, very profitable positions in illiquid markets.
- Assuming every exchange handles ADL with the same ranking rules.
Learn and practise
FAQ
Why did my profitable position get closed by the exchange?
It may have been auto-deleveraged. When a liquidation cannot be filled and the insurance fund is short, the exchange reduces top-ranked profitable positions on the other side.
How can I lower my ADL risk?
Use lower leverage and take partial profits on large winning positions, which lowers your rank in the ADL queue.