ADL
What is Auto-Deleveraging?
Auto-Deleveraging, or ADL for short, refers to a forced liquidation mechanism adopted by the counterparty to control the overall risk of the platform when the counterparty has a position shortfall, extreme market conditions or force majeure factors lead to a rapid decline in insurance funds. When ADL is triggered, the ADL engine will select the user with the highest leverage return on the platform to reduce their positions.
ADL process
ADL ranking
The ranking of ADL is based on the leverage return of the position (profit and loss ratio and effective leverage used). The greater the leverage return, the higher the ranking. The traders with the highest ranking in the system will be selected first by the ADL engine.
Traders can check the priority level of the current position in the automatic deleveraging sequence through the "Auto-deleveraging indicator light". There are 5 indicator lights in total. The more lights on, the higher it is in the ranking.
Sorting formula:
Sorting = Profit Percent * Effective Leverage (if the position is profitable)
Sorting = Profit Percent / Effective Leverage (if the position is losing money)
Effective leverage = abs[(mark value)/(mark value-bankruptcy value)]
Forward contract:
Profit percentage (long) = (mark value - average opening value) / (average opening value)
Profit percentage (short) = (average opening value - marked value) / (average opening value)
Reverse contract:
Profit percentage (long) = (average opening value - mark value) / (average opening value)
Profit percentage (short) = (mark value - average opening value) / (average opening value)
ADL trigger
After the ADL is triggered, the platform will directly find the counterparty's top-ranked account and directly complete the transaction with the counterparty's account at a new price calculated based on the position bankruptcy price and insurance fund compensation amount.
In the case of isolated positions, long/short positions are subject to the risk of ADL transactions.
Under cross margin, the automatic deleveraging mechanism will not select fully hedged positions. If there are positions that are not fully hedged, only the excess portion that is not fully hedged may be affected by automatic deleveraging, and the hedged portion will not be affected.
Positions that are ADL do not need to pay handling fees.
ADL completed
When the user's position is automatically reduced, the relevant contract position of the account is reduced, and the profit from the position is converted into the account balance.
Traders will receive SMS and email notifications informing them of the reduced positions and the reduction price. At the same time, they can also find the record marked as "ADL" on the historical order page.
After ADL is completed, traders are free to re-enter the market for trading.
Example:
The trader's account balance is 10,000 USDT. When the BTC/USDT price is 20,000, he opens a long position of 5 BTC with 10 times leverage. The liquidation price is 19,090, the bankruptcy price is 19,000, and the price after insurance fund compensation is 18,090.
After triggering the forced liquidation, if the system cannot close the position at a price better than 18090 (the price after insurance fund compensation), the ADL system will take over the position.
Assume that there are 5 short (reverse direction) positions on the exchange:
User | BTC short positions | Ranking (profit percentage * effective leverage) | Ranking percentage |
A | 3 | 5 | Top (0, 20%] (5 grid lights) |
B | 3 | 4 | Top (20%, 40%] (4 grid lights) |
C | 2 | 3 | Top (40%, 60%] (3 grid lights) |
D | 2 | 2 | Top (60%, 80%] (2 grid lights) |
E | 3 | 1 | Top (80%, 100%] (1 grid lights) |
In the above table, traders A and B will be selected by the ADL system. User A's 3 BTC short positions and User B's 2 BTC short positions will be forcibly executed at the price of 18090. Trader B’s remaining 1 BTC short position will be retained.
How to reduce the risk of auto-deleveraging?
ADL will only be triggered under very extreme market conditions. During normal trading, traders do not need to worry about being selected by the ADL engine. In extreme market conditions, if traders want to reduce the risk of being selected by the ADL engine, they can try the following measures:
Lowering the leverage used in the position will immediately reduce the ADL queue;
Although partially closing profitable positions will not reduce the ADL queue, it will reduce the risk of the number of positions being ADLed.
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