Is ADL More Common in High-Leverage or Low-Leverage Trading Environments?
ADL is significantly more common in high-leverage trading environments. High leverage leads to faster liquidations and a higher probability that the liquidation price will be worse than the bankruptcy price, resulting in deficits.
This, in turn, increases the strain on the insurance fund and the likelihood of the ADL system being triggered.
Glossar
High Leverage
Amplification ⎊ High leverage, within cryptocurrency and derivatives markets, fundamentally alters risk-reward profiles by enabling a smaller capital outlay to control a larger notional exposure.
Market Volatility
Dispersion ⎊ Market volatility within cryptocurrency, options, and derivatives contexts represents the magnitude of price fluctuations over a defined period, quantified typically by standard deviation or variance of logarithmic returns.
Faster Liquidations
Liquidation ⎊ In cryptocurrency derivatives, particularly within options and perpetual futures contracts, accelerated liquidation processes are increasingly vital for maintaining market stability and mitigating systemic risk.
Leverage Setting
Parameter ⎊ Leverage setting defines the specific parameter that determines the ratio of borrowed capital to a trader's own collateral for a derivatives position.