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.