Auto-deleveraging is a futures trading mechanism where orders that are liquidated in futures trading are first forcibly closed by the system. If the order is not fully liquidated, it will enter auto-deleveraging. Auto-deleveraging involves matching the passively liquidated orders with the unfilled liquidation orders from the opposing side. The auto-deleveraging mechanism helps traders reduce risks. The sequence of deleveraging is determined based on leverage and profit ratios.
Orders of clients who are liquidated are first forcibly closed by the system. If the liquidation order is not fully matched, the remaining portion will be auto-deleveraged. The system then looks for the ADL queue and starts deleveraging from the top. Auto-deleveraging refers to the passively liquidated side, which often consists of profitable clients, matching with the unfilled liquidation orders from the opposing side.
Auto-Deleveraging Ranking System
(1) Deleveraging Process
Positions are liquidated based on the bankruptcy price of the trader's liquidated position. If the insurance fund is still insufficient, the auto-deleveraging strategy will be triggered.
The counterparty calculates the PnL ranking based on the yield and effective leverage.
Traders with the most aggressive strategies and highest profits are prioritized in the ADL sequence.
The ADL execution side is matched with traders ranked highest in effective leverage PnL at the bankruptcy price for auto-deleveraging.
(2) ADL Indicator
The ADL indicator provides a warning based on the ranking of all your positions in the contract (taking the highest). At any time, your position in the sequence is displayed by this indicator, which shows your priority in the queue in 20% increments.
If all lights are lit, it means your position is in the highest percentile, and you may experience deleveraging if liquidation orders in the market cannot be matched.
If auto-deleveraged, you will receive a notification. Pending orders will be canceled, and you can reopen your position.
(3) Auto-Deleveraging Ranking Formula
ADL Ranking = Profit Percentage * Effective Leverage (if profitable)
ADL Ranking = Profit Percentage / Effective Leverage (if losing)
Where:
Effective Leverage = abs(Mark Value / (Mark Value - Bankruptcy Value))
Profit Percentage = (Mark Value - Average Entry Value) / abs(Average Entry Value)
Mark Value = Position value at the mark price
Bankruptcy Value = Position value at the bankruptcy price
Average Entry Value = Position value at the average entry price
The system ranks both long and short positions separately from high to low.