In the world of cryptocurrency derivatives trading, risk management is paramount. One critical mechanism that helps maintain platform stability during volatile market conditions is Auto-Deleveraging (ADL). Unlike common misconceptions, ADL is not a standalone risk event like forced order cancellation or margin calls. Instead, it functions as a specialized form of forced liquidation, activated only when traditional methods fail due to insufficient market liquidity.
When extreme price movements occur—often referred to as "black swan events"—exchanges must act swiftly to protect both individual accounts and the overall health of the system. This is where ADL comes into play.
How ADL Supports Forced Liquidation
As outlined in standard account risk management protocols, when a trader’s maintenance margin ratio exceeds 100%, the system triggers a forced liquidation process. Under normal circumstances, this involves placing a market order on the order book to close the position through standard matching mechanisms.
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However, if the market lacks sufficient depth—meaning there are no matching orders available—the liquidation cannot be completed via conventional means. In such cases, if the maintenance margin ratio climbs beyond 200%, or if the collateral value drops below zero during liquidation, the ADL mechanism is activated.
Once triggered, the system bypasses the order book entirely. Instead, it identifies a counterparty from among profitable opposing positions using an algorithmic ranking system. The liquidation is then executed directly against this selected account at the mark price, ensuring immediate closure and eliminating the risk of negative equity or platform-funded payouts.
This design ensures that exchange capital is never used to cover trader losses—a key factor in preserving the platform's solvency and protecting all users' funds.
Clarifying Common Misunderstandings
To avoid confusion, two key points should be clearly understood:
- For the liquidated account, ADL is not a separate process but rather the method by which forced liquidation is completed when market liquidity fails.
- For the counterparty account, participation in ADL means their position serves as liquidity. As a result, they experience an automatic reduction in leverage and have a portion of their profits locked in.
Thus, while one side faces involuntary closure due to excessive risk, the other benefits from partial profit realization—albeit involuntarily—during favorable market trends.
How ADL Counterparties Are Selected
The selection of ADL counterparties follows a transparent, rules-based system centered around the Leverage Profit Score (LPS). Accounts with higher scores appear earlier in the ADL queue and are more likely to be called upon when needed.
Leverage Profit Score Formula
Leverage Profit Score = Account Maintenance Margin Rate × Position Profit Rate
Each component is calculated as follows:
- Account Maintenance Margin Rate (Isolated Mode):
(Total Maintenance Margin + Number of Long Option Positions × Strike Price) / (Total Margin Balance + Number of Long Option Positions × Strike Price) - Account Maintenance Margin Rate (Portfolio Margin Mode):
Total Maintenance Margin / Total Collateral Value - Position Profit Rate (Long):
MAX((Mark Price - Entry Price) / Entry Price × 100%, 0) - Position Profit Rate (Short):
MAX((Entry Price - Mark Price) / Entry Price × 100%, 0)
Note: If two accounts have identical Leverage Profit Scores, tie-breaking criteria apply in this order:
- Larger position size → smaller
- Higher position profit rate → lower
- Higher account maintenance margin rate → lower
Even isolated margin positions are included in the ADL ranking, using their respective isolated metrics for calculation.
Practical Example
Consider Amy, who holds a long position in BTCUSD perpetual contracts. Due to rapid price declines, her maintenance margin ratio surpasses 200%, triggering ADL-based liquidation.
The system scans all opposing short positions—held by traders A, B, C, and D—and calculates their Leverage Profit Scores. Suppose Trader A has the highest score due to a large, highly profitable short position with moderate leverage. In this case, A will be selected as the counterparty and matched directly with Amy’s liquidation at the current mark price.
This direct match ensures instant execution without reliance on public order flow.
Monitoring Your ADL Risk
Users can assess their exposure to ADL directly within the trading interface. On the positions page, each contract displays an indicator light next to its name. The number of illuminated segments reflects your position in the ADL queue:
- More lights = higher likelihood of being selected
- Fewer lights = lower risk of automatic deleveraging
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After an ADL event occurs, affected users receive a notification via email or SMS detailing the executed trade. Full transaction records are also accessible under the order history section. Importantly, traders can re-enter the market immediately after an ADL event—there are no restrictions on future trading activity.
Can You Avoid Being Subject to ADL?
While being on the receiving end of ADL might seem undesirable, it's actually a sign that your position is highly profitable and well-timed. However, remaining too long in such positions carries its own risks.
Markets are inherently unpredictable. A trend that favors your position today could reverse sharply tomorrow—turning your high-profit, high-LPS account into a candidate for forced liquidation.
Therefore, ADL serves a dual purpose:
- It provides liquidity assurance for failing positions
- It acts as a risk mitigation tool for over-leveraged winners
By automatically reducing exposure at peak profitability, ADL encourages prudent risk management—even when traders don’t take action themselves.
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Frequently Asked Questions (FAQ)
Q: Is ADL the same as forced liquidation?
A: No. ADL is a method used to complete forced liquidation when market liquidity is insufficient. It only activates after standard liquidation attempts fail.
Q: Will I lose money if my account undergoes ADL?
A: No. Only profitable positions with high Leverage Profit Scores are selected. ADL reduces your position size and locks in part of your gains—it does not result in a loss.
Q: Can I opt out of ADL?
A: There is no opt-out mechanism. All eligible opposing positions participate in the ranking system to ensure fair and orderly risk distribution.
Q: Does ADL affect spot or options trading?
A: ADL applies primarily to perpetual futures and derivatives contracts under isolated or portfolio margin modes. It does not impact spot trading directly.
Q: How often does ADL occur?
A: ADL is rare and only activates during periods of extreme volatility or flash crashes where order books become severely imbalanced.
Q: Are partial positions closed during ADL?
A: Yes. The system may fully or partially close your position depending on the size of the liquidated account and current queue positioning.
By integrating automatic deleveraging into its risk framework, modern trading platforms enhance systemic resilience without compromising fairness. For informed traders, understanding ADL isn’t just about avoiding risks—it’s about recognizing opportunities and managing success responsibly.
Core Keywords: Auto-Deleveraging (ADL), forced liquidation, leverage profit score, maintenance margin ratio, mark price, cryptocurrency derivatives, risk management, perpetual contracts