How Does the Auto-Deleveraging Mechanism Work? (ADL)

If the insurance fund is unable to cover losses during liquidation, the Automatic Deleveraging (ADL) mechanism will be triggered. 

What is Auto-Deleveraging Mechanism (ADL)

• Think of Auto Deleveraging, or ADL, as the last resort or the point of no return.
• Before reaching this point, the exchange will try to liquidate your position at the liquidation price (the point at which your leveraged positions are automatically closed out). But if the position cannot be liquidated before reaching the bankruptcy price (the price at which a trader's collateral would be fully wiped out due to losses) due to high market volatility, then auto deleveraging will occur and you lose all your collateral.
• The ADL mechanism is put in place for a specific reason, which is to ensure healthy liquidity on Bitflex's perpetual swap market and help traders avoid a negative balance. 

How does the ADL system work?

The ADL system selects and prioritizes traders with the highest ranking to deleverage. This is derived from a ranking of highest profits and effective leverage used.

The system then matches the selected profiting positions with liquidation orders at ‘Bankruptcy Price’. There will be a Maker’s rebate paid to the trader covering the loss, and a Taker’s fee charged to the trader’s whose loss was covered.

Lastly, Traders who experience an ADL will receive an email or phone notification and have all of their active orders closed. After this, they are free to re-enter the market.

Example:

• A trader buys 3,000 contracts of BTCUSD at USD 8,000. Let’s assume they have a liquidation price at USD 7,700 and a bankruptcy price at USD 7,500.

  When the mark price hits liquidation price, their 3,000 contracts are forcibly liquidated. However, the current last traded price was USD 7,300, which is much lower than their bankruptcy price. As there is an insufficient balance in the insurance fund to cover the contract loss, the ADL system will take over the liquidation process.

Risk Limit 

For users who trade perpetual contracts, we force users to choose a risk limit. This is to better reduce the user's position risk, this prevents individual users with huge positions from being liquidated and other users being automatically deleveraged their positions.

When the maintenance margin rate of high-level users is insufficient, the forced liquidation will not be triggered immediately, but will reduce the risk limit level (reduce some positions and reduce the maintenance margin rate) until it reaches the lowest level. 

The higher the limit, the higher the ratio of the maintenance margin paid to the initial margin, which reduces the risk of users' liquidation. 

If the user's position is greater than the risk limit, the user's order will fail. Users can adjust the risk limit gear at any time, but if the margin is insufficient, the limit cannot be modified. 

Example (the same formula applies to the other 7 trading pairs available which are ETHUSDT-P, DOTUSDT-P, XRPUSDT-P, ADAUSDT-P, NEARUSDT-P, BNBUSDT-P, and FTMUSDT-P):