How Does Auto-Deleveraging (ADL) Work and Why Does an Exchange Try to Avoid It?

Auto-Deleveraging is a mechanism used when the insurance fund is insufficient to cover losses from a bankrupt position. The exchange forcibly closes profitable positions of opposing traders to cover the shortfall.

Profitable traders are ranked by profit and leverage, and their positions are closed at the bankruptcy price of the losing trade. Exchanges avoid ADL because it is highly disruptive, causes uncertainty, and can erode trader confidence by forcing profitable positions to close unexpectedly.