Auto-deleveraging (ADL)

A last-resort mechanism on perpetual exchanges that force-closes profitable traders' positions in a market to cover losses that liquidation and the backstop fund could not absorb, usually starting with the most profitable and most leveraged positions.

Definition

Auto-deleveraging, usually shortened to ADL, is what happens when a liquidation cannot be completed at a price that covers the loss. The exchange closes positions on the winning side of the same market to balance the books, at a price it sets, whether or not those traders wanted to exit.

Why it exists

A perpetual market is zero-sum between its two sides. If a liquidated position leaves a shortfall, someone has to absorb it. Venues first send it to an insurance or backstop fund, funded by liquidation penalties and, on some protocols, by a liquidity vault.

ADL is the layer below that. It exists so the exchange never has to run a deficit, which would otherwise mean paying out profits it does not hold.

How it selects positions

Ranking varies by venue, but the common principle is that the most profitable and most highly leveraged positions on the opposite side are closed first. Being right and being aggressive is what puts you at the front of the queue.

What it means for you

Your winning position can be closed without your instruction, at a price you did not choose, in the middle of the move you were positioned for. The profit realised up to that point is yours, but the exposure is gone and re-entering means paying the spread and fees again into a market that has already moved.

There is no setting that opts you out. The exposure to ADL comes with trading perpetuals, and it is one reason the backstop fund’s health is worth glancing at on venues that publish it.

Where you will run into it

Rarely, and almost always after a violent one-directional move in a market with thin liquidity. Exchanges usually publish an ADL indicator per position and a notification when it happens.