In the fast-moving world of perpetual and futures trading, risk management systems are critical for platform stability—especially during extreme market volatility. One such safeguard is the Automatic Deleveraging (ADL) mechanism. This system helps maintain order when mass liquidations threaten to overwhelm platform resources. In this guide, we’ll break down how ADL works, when it's triggered, how rankings are calculated, and most importantly—how traders can protect themselves.
What Is the ADL Mechanism?
The Automatic Deleveraging (ADL) mechanism is a risk control feature used by derivatives trading platforms to manage systemic exposure during periods of high volatility. When a trader’s position is liquidated and the insurance fund cannot absorb the resulting loss (known as a "clawback" or "auto-deleveraging event"), the system automatically reduces offsetting profitable or highly leveraged positions.
ADL ensures that the platform remains solvent by matching liquidated positions with opposing profitable ones, effectively closing both at the bankruptcy price of the liquidated position. This prevents cascading failures across the exchange’s financial structure.
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Understanding the Insurance Fund
Before diving into ADL, it’s essential to understand the insurance fund—a critical buffer designed to absorb losses from liquidated positions.
This fund consists of:
- Excess margin from liquidated positions closed above their bankruptcy price.
- Platform-provided capital to backstop extreme scenarios.
When a position is forcibly closed, any deficit between the liquidation price and the bankruptcy price is covered by the insurance fund. If multiple positions are liquidated simultaneously—such as during a flash crash—the cumulative loss may exceed the fund’s capacity.
You can monitor real-time insurance fund balances through:
- Publicly accessible fund history pages.
API endpoints for developers:
- OpenAPI: Updates every minute for isolated pools; daily for shared pools.
- WebSocket: Real-time second-by-second updates for isolated pools (shared pools have no live push).
Some trading pairs share a common insurance pool, while others maintain separate ones based on risk profiles.
When Is ADL Triggered?
ADL activates only under one condition: when the insurance fund is insufficient to cover losses from ongoing liquidations.
More precisely, ADL kicks in when:
Insurance Fund Balance + Position Margin + Unrealized P&L ≤ 0
This means the combined value of the fund and the failing position has dropped to zero or below. At this point, the system must offload risk onto other traders via ADL.
It’s important to note that ADL is a last-resort measure. It does not occur during normal market conditions or isolated liquidations. Only during severe drawdowns—like those seen in black-swan events—does this mechanism come into play.
How Does Automatic Deleveraging Work?
Once triggered, ADL follows a structured process:
- The system identifies opposing profitable or high-leverage positions.
- These positions are ranked using an ADL priority score, primarily based on leverage yield.
- The highest-ranked positions are automatically reduced to offset the failing long or short.
- Both positions are closed at the bankruptcy price of the originally liquidated trade.
- Any difference between this price and the market price is returned to the insurance fund.
Traders whose positions are selected receive immediate email notifications, and all active orders are canceled. However, they retain full trading privileges afterward.
Key Points:
- Higher leverage and higher unrealized profits increase ADL risk.
- Even losing positions can be subject to ADL—but they rank lower than profitable ones.
- ADL lights (or indicators) in your dashboard reflect your current risk level (from 1 to 5 bars).
Calculating Bankruptcy Price for Insurance Fund Settlement
To determine where a position would be bankrupted, exchanges use a standardized formula. For a long position:
Bankruptcy Price = [(Entry Price × Quantity) – Position Margin – Wallet Balance] ÷ Quantity
Let’s walk through an example:
| Parameter | Value |
|---|---|
| Trading Pair | ABCUSDT |
| Direction | Long |
| Position Size | 100 |
| Entry Price | $500 |
| Position Margin | $1,000 |
| Wallet Balance | $100 |
| Mark Price | $400 |
Using the formula:
Bankruptcy Price = [(500 × 100) – 1,000 – 100] / 100 = $489
If this calculated price deviates more than 5% from the mark price, the system uses the mark price instead to prevent manipulation and ensure fairness.
How Is ADL Ranking Determined?
ADL ranking is based on leverage yield, which varies depending on margin mode.
For Isolated Margin:
- Profitable Positions:
Leverage Yield = Position P&L (%) × Position Maintenance Margin Rate - Loss-Making Positions:
Leverage Yield = Position P&L (%) / Position Maintenance Margin Rate
For Cross Margin / Portfolio Margin:
- Profitable Positions:
Leverage Yield = Position P&L (%) × Account MMR - Loss-Making Positions:
Leverage Yield = Position P&L (%) / Account MMR
Where:
- Position P&L (%) = (Mark Price – Entry Price) / Entry Price (for longs)
- MMR (Maintenance Margin Rate) adjusts dynamically based on position size and risk
Higher leverage yield = higher ADL risk.
Example Scenario:
Suppose six traders hold short positions:
| Trader | Contracts Sold | ADL Rank | Risk Level |
|---|---|---|---|
| A | 5,500 | 1 | 20% (5 bars) |
| B | 2,500 | 2 | 40% (4 bars) |
| C | 2,000 | 3 | 60% (3 bars) |
| D | 3,000 | 4 | 60% (3 bars) |
| E | 2,000 | 5 | 80% (2 bars) |
| F | 5,000 | 6 | 100% (1 bar) |
If 5,000 contracts need to be deleveraged, Trader A’s position is first in line. After reducing 5,000 contracts, only 500 remain. Their new leverage profile may drop them out of the top risk tier.
For larger events (e.g., 10,000 contracts), Traders A, B, and C could all be affected sequentially.
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How to Check Your ADL Ranking
Most platforms display your ADL risk level directly in the positions tab of your trading interface.
On desktop:
- Navigate to your open positions.
- Look for an ADL indicator (often visualized as bars or a percentage).
On mobile apps:
- Open your portfolio view.
- Tap on any futures position to see its ADL risk level.
These indicators update in real time based on market movement and your margin usage.
How to Reduce Your ADL Exposure
You don’t have to be at the mercy of ADL. Here are practical ways to lower your risk:
✅ Lower Your Leverage
Reducing leverage instantly improves your ADL ranking. High leverage amplifies both gains and systemic risk.
✅ Partially Close High-Risk Positions
Selling part of your position reduces exposure without fully exiting. Note: This doesn’t improve your ADL rank per contract but lowers total risk volume.
✅ Use Stop-Loss Orders Strategically
Preemptively exiting before liquidation helps avoid contributing to systemic stress—and keeps you out of ADL queues.
✅ Monitor Market Volatility
During high-volatility periods (e.g., major news events), consider tightening positions or switching to lower leverage.
✅ Diversify Across Platforms
Spreading activity across exchanges reduces single-point exposure to ADL events.
👉 See how top traders optimize their risk settings before volatile events.
Frequently Asked Questions (FAQ)
Q: Can I completely avoid ADL?
A: While you can’t opt out entirely, lowering leverage and avoiding overexposure significantly reduces your chances of being selected.
Q: Does being in profit increase my ADL risk?
A: Yes. Profitable, highly leveraged positions are prioritized because they have capital to absorb losses.
Q: Will I lose all my position if ADL triggers?
A: No. Only enough contracts to cover the shortfall are closed. Remaining contracts stay open.
Q: Are fees charged during ADL?
A: Yes. The selected trader pays maker fees, while the liquidated trader pays taker fees, preserving fee fairness.
Q: Is ADL transparent?
A: Most platforms provide real-time logs and APIs so users can verify when and why ADL occurred.
Q: Does ADL happen often?
A: Rarely. It typically occurs only during extreme market moves—like Bitcoin dropping 30% in hours.
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