How Does ADL Differ from ‘Socialized Losses’ in Futures Trading?
Socialized losses occur when the total deficit from all bankrupt positions exceeds the insurance fund, and the exchange then distributes the remaining loss proportionally among all profitable traders. ADL is a more targeted approach, forcibly closing specific profitable opposing positions to cover a single bankrupt trade's deficit.
ADL is generally preferred by exchanges as it is less broad and allows for more precise risk management than a system-wide socialized loss event.
Glossar
Socialized Losses
Exposure ⎊ The concept of socialized losses, particularly within cryptocurrency derivatives and options trading, describes a scenario where the financial burden of a counterparty's failure or adverse market movements is disproportionately borne by other participants within the ecosystem, rather than being fully internalized by the failing entity.
Losses
Impairment ⎊ Losses in cryptocurrency, options, and derivatives trading represent a reduction in the recorded carrying value of an asset due to declines in market prices or counterparty creditworthiness.
Profitable Opposing Positions
Strategy ⎊ Profitable opposing positions in cryptocurrency derivatives leverage inherent market inefficiencies and volatility, demanding a nuanced understanding of risk-reward profiles.
Socialized Loss
Mechanism ⎊ Socialized loss, within cryptocurrency derivatives and options trading, describes the distribution of losses across a broader participant base than those directly holding a losing position, often amplified by leveraged exposure and cascading liquidations.