Auto-deleveraging (ADL)

When a leveraged position is liquidated, the exchange tries to close it in the market at a price better than the bankruptcy price, where the trader's margin hits zero. If the market moves too fast and the position closes at a worse price, the shortfall is paid from the insurance fund. If that fund is empty or insufficient, the exchange triggers auto-deleveraging.

ADL matches the bankrupt position against traders on the opposite side, ranked by profit and leverage, and closes part or all of their positions at the bankruptcy price. Exchanges show a queue indicator, often a row of lights, telling each user how close they are to being deleveraged. Decentralized perp exchanges use similar mechanisms or socialize losses across a liquidity pool.

For the affected trader ADL is frustrating: a winning position is closed without warning, usually during the most volatile minutes, and cannot always be reopened at the same price. It is rare on large venues with deep insurance funds but becomes more likely on smaller exchanges and illiquid altcoin contracts.