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Perpetual Futures | Auto-Deleveraging (ADL) Mechanism
BingX
2023-05-12 12:12

1. What Is Auto-Deleveraging (ADL)?

Auto-deleveraging, or ADL for short, is a mechanism to control the platform’s overall risk exposure by force-liquidating the counterparty in the event of extreme market conditions or uncontrollable factors that lead to insufficient or rapid depletion of the insurance fund. When ADL is triggered, the ADL engine will auto-deleverage users, starting from those with the highest leveraged profits on the platform.
 
 

2. Auto-Deleveraging Process and Details

a) Auto-deleveraging ranking
The ADL ranking is sorted based on the leveraged profits of users' positions (PnL ratio and effective leverage used). The higher the leveraged profits, the higher ranking the user has. The user with the highest ranking in the system will be selected by the ADL engine first.
When trading on Perpetual Futures, users can check their positions' ADL priority through the "ADL Indicator". There are five lights in total. The more lights lit, the higher the position's ADL priority.
b) Triggering of auto-deleveraging
After ADL is triggered, the platform no longer handles forced liquidations or partial liquidations of user positions by placing orders in the market and waiting for suitable prices to match. Instead, it directly matches the bankruptcy price of the positions being liquidated with counterparties who have the highest ADL ranking.
  • Under isolated margin mode, both long/short positions are at risk of ADL.
  • Under cross margin mode, the ADL system will not select fully hedged positions. Only the excess portion of partially hedged positions may be selected by ADL, while the hedged portion will remain unaffected.
Maker fees will be collected from users selected by the ADL engine. While taker fees will be collected from users who are being forced liquidation.
c) Completion of auto-deleveraging
After a user undergoes auto-deleveraging, their corresponding futures positions are automatically deleveraged; profits of the positions are realized and added to the trader's account balance.
Users will receive SMS and email notifications, informing them of the auto-deleveraged position and price. They can also find the record of that specific position on the order page, categorized as auto-deleveraging.
After the ADL is completed, users can resume trading in the market.
Example:
A user has an account balance of 5,000 USDT and opens a long position of 2 BTC with 10x leverage when the BTC/USDT price is 10,000 USDT. The forced liquidation price is 7,538.92 USDT.
After a forced liquidation occurs, if the position cannot be liquidated at a price better than 7507.62 USDT (the bankruptcy price), and the balance of the insurance fund is not enough to cover the loss of the position, the ADL system will take over this position.
Assuming there are currently six short (opposite direction) positions on the exchange:
Users With Short Positions Short Position Amount (BTC) Ranking (PnL Ratio * Effective Leverage) Percentile
User A 3 6 (highest) First 20% (5 lights)
User B 1 5 First 40% (4 lights)
User C 2 4 First 60% (3 lights)
User D 2 3 First 60% (3 lights)
User E 2 2 First 80% (2 lights)
User F 1 1 (lowest) First 100% (1 light)
According to the table above, User A ranks highest in the ADL queue. User A will be selected by the ADL system first, and 2 BTC of his/her short positions will be forcibly matched at 7507.62 USDT (the bankruptcy price of the liquidated position). User A's remaining 1 BTC short position is unaffected. Using the same example, if there are 6 BTC short positions that need to be auto-deleveraged, User A, B, and C will all be selected.
 
 

3. How to Reduce the Risk of Auto-Deleveraging?

ADL is a mechanism that is triggered only in extremely volatile markets, and users need not worry about being selected by the ADL engine under normal trading conditions. However, if users want to reduce the risk of being selected by the ADL engine, they can consider the following measures:
  • Lower the leverage used in positions; it will instantly reduce its priority in the ADL queue.
  • Partially close profitable positions; although this won't reduce the priority in the ADL queue, it can reduce the position amount at risk of ADL.
  • If a partial position close still doesn't improve the situation, please consider closing the entire position.
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