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.

The Auto-Deleveraging (ADL) mechanism is applied in exactly these extreme cases.

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 by available liquidity in the order book. Liquidity providers supply it 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. At this point, the system switches to ADL.

ADL places additional limit orders in 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 opposing position.

Last order: may be equal to or less than the size of the opposing position (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 Mark 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 liquidated Long position, the price is set slightly below the Mark Price: 
  PriceADL = MarkPrice × (1 - d)
• for a liquidated Short position, slightly above:
  PriceADL = MarkPrice × (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 positions 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 closer the position is to the front of 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 rating.

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 Mark Price of $42,000. The system calculates the rankings of long traders:

Trader A (rating 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 (the remaining volume), 3 BTC remain open

Trader C (rating -0.05)

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

ADL price calculation:

MarkPrice = $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 ADL queue for this market. It indicates the likelihood that your position will be selected 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 Grade depends on the number of market participants
• Updated in real time — the Grade is recalculated 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 MarkPrice 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 were you 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

Please note that ADL fills appear in the standard API order history and are identifiable within the response data.

Risk Management

The likelihood of involvement in ADL is reflected in the ADL Grade. When the Grade is 2–4, the position is considered more likely to be included in the ADL mechanism.

The ADL Grade is influenced by factors such as position size, leverage level, and profitability. Higher leverage increases the effective position size, which may raise the corresponding rating. Reducing leverage lowers this metric accordingly.

Loss-making positions are not included in ADL, as the mechanism is applied to profitable positions based on priority ranking. Stop-loss changes the position’s state before liquidation scenarios occur, which may affect its potential involvement in such processes.

Additionally, the margin level impacts the overall resilience of a position to liquidation events. A higher margin level reduces the likelihood of liquidation, which is a prerequisite for ADL activation.

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.