Auto-Deleveraging (ADL) is the final stage of liquidation in the futures market, which is applied only when there is insufficient liquidity in the market to fully cover the losses of the position being liquidated.

This risk management mechanism in the futures market is used during position liquidation to ensure that the user’s balance does not become negative after the position is closed.

During liquidation, the system must fulfill a key condition: the user must fully cover their debt. In other words, after liquidation is complete, the balance cannot be less than zero.

However, there are exceptional situations where this is impossible. For example, if the price changes too quickly while a liquidation order is being executed, or if there is insufficient liquidity in the market.

It is precisely for such extreme cases that the Auto-Deleveraging (ADL) mechanism is applied.

General Concept

The main objective is to close the liquidated user’s position before their balance turns negative.

ADL is not a standard part of every liquidation. It is a final mechanism that is triggered only when normal market liquidity is insufficient.

How liquidation works

The process occurs sequentially.

Stage 1. Market Liquidity

Market liquidity is used first. This is the system’s first line of defense, ensuring that liquidation orders are absorbed through available liquidity in the order book. Liquidity is provided by liquidity providers to avoid involving users with profitable positions. If there is sufficient liquidity, the position is fully closed at this stage, and the ADL mechanism is not used.

Stage 2. ADL Activation

If there is insufficient liquidity, part of the position remains open, and there is a risk of a negative balance. It is at this point that the system switches to ADL.

It adds additional limit orders to the order book to close the remaining portion of the position.

ADL is strictly a last-resort mechanism and is never applied until market liquidity has been completely exhausted.

How ADL Works

Limit Orders in the Order Book

ADL orders are placed in the order book at the bankruptcy price. This is the level at which the liquidated user’s equity approaches zero. This approach ensures that the user will not incur a negative balance even in the event of aggressive market movements.

ADL orders are standard limit orders that are added to the order book. They are not executed immediately and behave like standard market liquidity. This means that they may either be filled or remain unfilled, depending on market conditions.

If sufficient external liquidity appears at the time of placement or before execution, ADL orders may not be filled at all. Thus, the mere fact of their appearance does not guarantee an actual impact on the market or other positions.

ADL Order Volume

All orders except the last one: the volume equals the full size of the counterparty’s position.

Last order: may be equal to or less than the position size (to close exactly the required volume).

Bankruptcy Price

Before liquidation begins, the system records market parameters and calculates the price at which the position can be closed without the risk of a negative balance.

This price is called the bankruptcy price.

The calculation is based on the following values:

• current market price (Last Price)
• ratio of total collateral balance to used margin (Margin Fraction)
• taker_fee_rate (order execution fee)

First, the parameter d is determined:

d = Margin Fraction - 2 × taker_fee_rate

After that:

• for a Long position, the price is set slightly below the market 
  PriceADL = LastPrice × (1 - d)
• for a Short position, slightly above
  PriceADL = LastPrice × (1 + d)

This ensures that the position is closed without incurring debt.

Who Participates in ADL

In the futures market, the total volume of long and short positions is always balanced. This means that when one side is liquidated, the system uses the opposite side as a source of liquidity.

If a short position is liquidated, long positions are used. If a long position is liquidated, short positions are used.

Participants whose positions may be used form the ADL queue. They are not the users being liquidated. Their positions are used as a source of liquidity to complete the liquidation of other traders.

Which positions can be used

The system does not draw on every position indiscriminately.

Only those with a positive rating (profitable positions) are used.

Loss-making positions do not participate in this mechanism.

How the queue is formed

Separate lists of Long and Short positions are created for each market.

Each position receives an internal rating, which depends on two factors:

• profit level
• effective leverage

For profitable positions, the following formula is used:

Rating = (% profit) × (Effective leverage)

where:

% profit = Unrealized profit / |Position size in money|

Effective leverage = |Position size in money| / Account equity

This means that the higher the profit and the higher the leverage, the higher the position in the queue.

How the selection works

The system operates sequentially.

It takes the list of opposing positions and starts with those that have the highest ranking.

Positions are then closed one after another until the total volume is sufficient to fully close the liquidated position.

If necessary, only a portion of the last position’s volume may be used, rather than the entire amount.

Example

A short position of 10 BTC is liquidated at a market price of $42,000. The system calculates the rankings of long traders:

Trader A (ranking 0.26 – top priority)

• Position: Position: 5 BTC, profit $35,000
• Selected: 5 BTC closed

Trader B (rating 0.167 – second priority)

• Position: 8 BTC, profit $8,000
• Selected: 5 BTC closed (remaining), 3 BTC remain open

Trader C (rating -0.05)

• Position: 6 BTC, loss -$3,000
• NOT SELECTED (only positive ratings)

ADL price calculation:

LastPrice = $42,000

Margin Fraction of liquidated ≈ 0.02

taker_fee_rate = 0.05% = 0.0005

d = 0.02 - 2 × 0.0005 = 0.019

For Short: PriceADL = $42,000 × (1 + 0.019) = $42,798

Result:

• The 10 BTC position is closed at $42,798 (fair price, slightly above market)
• Traders A and B have preserved their profits
• Trader C is protected (losing positions are not touched)
• The liquidated trader’s balance remains positive

ADL Grade: Your Priority in the Queue

What is ADL Grade?

ADL Grade shows your position in the priority list on this market. It indicates the likelihood that your position will be triggered during an ADL.

How ADL Grade is Calculated

1. All positions in the market are ranked by rating
2. Your position is determined: k = (your rank) / (total count), where 0 < k ≤ 1
3. ADL Grade is calculated using the formula:

If k < 0.5:    Grade = 0

If k < 0.73:   Grade = 1

If k < 0.87:   Grade = 2

If k < 0.95:   Grade = 3

If k ≥ 0.95:   Grade = 4

ADL Grade Levels

Grade 0-1: It is unlikely that you will be selected.

Grade 2-3: Moderate to high risk of selection during ADL.

Grade 4: You will be selected first if an ADL occurs.

What affects your Grade

• Your position’s rating — the higher the rating, the higher the Grade
• Number of other traders — with the same rating, your position depends on the number of market participants
• Updated in real time — when the price and profitability of your position change

What Happens During ADL

If your position is selected

1. Your position will be closed at a price calculated by the system (based on the LastPrice and the liquidator’s margin parameters).
2. You will receive a notification with the closure details (volume, price)
3. Your open orders in this market will be canceled

Why you are chosen

• You are in profit on the position—you can afford to close it
• Your rating is high enough—you are a priority for this market
• Other traders with lower ratings receive protection

Risk Management

Monitor your ADL Grade

• If your Grade is 2–4, you are in the risk zone
• Consider reducing your position or leverage

Reduce your leverage

• High leverage increases your effective leverage and your rating
• Reducing leverage lowers your Grade

Use a stop-loss

• Loss-making positions are not selected for ADL
• A stop-loss moves your position to a loss before ADL is triggered

Top up your margin in a timely manner

• Avoid liquidation—ADL is triggered only when others are liquidated
• The higher your margin, the safer you are

Summary

ADL is the system’s final protection mechanism.

It is activated only when the market cannot close out liquidations on its own.

Its purpose is to complete the process without negative balances and with minimal impact on the market.

Under normal conditions, it is not used and remains a reserve tool for extreme situations.