What Is Auto-Deleveraging (ADL)? Why Profitable Positions Can Be Closed

Has a futures position suddenly closed even though you were not losing money? ADL, or auto-deleveraging, may be the reason. Here is how it works.

What is ADL?

ADL (auto-deleveraging) is a last-resort safeguard: when an exchange cannot liquidate a losing position normally, it forcibly closes part or all of profitable positions on the opposite side to cover the exchange's overall loss. The key point is that a position can be closed even if you did nothing wrong and are making a profit.

In futures trading, one participant's profit is settled against another's loss. If losses exceed the losing side's margin, someone must cover the difference. ADL ultimately transfers that burden to the profitable side.

Why it happens: Bankruptcy price and the insurance fund

ADL activates when both of the following safeguards fail.

• Stage 1 — Crossing the bankruptcy price: A sudden price move can carry a losing position past its liquidation price. If it fills at a price worse than its bankruptcy price, where its margin reaches 0, the exchange is left with a shortfall.
• Stage 2 — The insurance fund runs out: The exchange's insurance fund normally absorbs this difference. But a crash or surge can trigger so many liquidations that the fund is exhausted. With that protection gone, ADL is activated.

How is liquidation priority determined?

Profitable positions are not all closed at once. The exchange assigns an ADL priority ranking and works down from the top. The following two factors generally raise a position's priority.

In other words, positions earning large profits at high leverage tend to be closed first. Most exchanges show your current ADL ranking with a 5-segment indicator on the order screen; more illuminated segments indicate greater risk.

What traders should know and how to respond

ADL is uncommon but tends to occur during extreme volatility. When it activates, the position is forcibly executed based on the current market price, and the trader cannot block or refuse it.

1. Watch the ADL indicator. More illuminated segments signal that your position is moving closer to the liquidation queue.
2. Avoid excessive leverage. Highly leveraged, highly profitable positions are first in line.
3. Re-entry after ADL is possible. If you still judge the trend to be valid after your position is closed, you can open a new position separately, but slippage and additional costs apply.

ADL spreads an exchange's system risk; it is not designed to target a particular trader. Still, it is safer to manage funds and leverage conservatively on the understanding that a position can close against your wishes. Volatility and leverage can produce unexpected profits or losses at any time, so trade only within what you can afford to lose.