What Is the Difference between ADL and a Margin Call’s Effect on Liquidity?
A margin call itself has no direct, immediate effect on market liquidity; it is merely a warning to the trader. If the margin call is not met, the resulting liquidation will impact liquidity as the exchange executes a large market order.
Auto-Deleveraging (ADL), however, is a direct, forced closure of a profitable position, which does affect liquidity by reducing the open interest and potentially causing a loss of market confidence.
Glossar
Open Interest
Derivatives ⎊ Open interest, within the context of cryptocurrency derivatives and financial options, represents the total number of outstanding contracts that have not been settled or closed.
Forced Closure
Trigger ⎊ Forced closure, within cryptocurrency derivatives and options trading, represents the automatic liquidation of a position due to insufficient margin to cover accruing losses, a critical risk management function.
Margin Call
Trigger ⎊ A margin call in cryptocurrency, options, and derivatives markets represents a broker’s demand for additional funds to bring an account back to the minimum required margin.