What happens after a liquidation
When a position is liquidated, the exchange takes it over and closes it in the market. Fill better than the bankruptcy price and the surplus goes to the insurance fund; fill worse and the fund covers the shortfall.
Absorbing those shortfalls is what the insurance fund is for, and in ordinary conditions it accumulates faster than it is drawn down.
The problem is a violent one-directional move: many positions liquidating at once, book depth exhausted, fills landing far worse than bankruptcy price. Shortfalls can accumulate faster than the fund can cover them.
ADL is what happens when the fund runs short
When the fund cannot cover the gap, the book still has to balance — longs and shorts must net out. That is structural to a perpetual.
So the exchange selects positions **on the profitable side** and closes them, using their gains to square the shortfall. That is auto-deleveraging.
The people selected did nothing wrong. They were right, the position was winning, and it was closed anyway. That is what makes ADL hard to accept: **it only happens when you are correct.**
How selection works
Most venues rank by **profit ratio multiplied by effective leverage**. The higher that product, the closer to the front of the queue.
The implications are direct:
Interfaces usually show an ADL indicator or a quantile bar giving your rough position in the queue. Most people never look at it until they have been deleveraged.
- More profit means a higher rank
- More leverage means a higher rank
- Both at once puts you first
What you can and cannot do
**Cannot**: most venues do not let you opt out. It is part of the liquidation engine, not an optional service.
**Can**:
None of this eliminates the risk. It only lowers the probability.
- Reduce leverage. That lowers the ranking product directly, and makes you harder to liquidate as a bonus
- Take partial profit during extreme moves, which lowers the profit ratio
- Watch the ADL indicator, particularly during violent one-way markets
- Spread across venues, since insurance fund sizes and trigger conditions differ
How it differs from liquidation
The two get conflated, and they point in opposite directions.
**Liquidation** happens when you are losing, because your margin ran out. **ADL** happens when you are winning, because somebody else's loss had nobody to absorb it.
Liquidation you manage with leverage and stops. ADL you can only rank lower in, because whether it fires depends on the whole market and on other people's positions.
Why it matters more for a neutral strategy
If you are running cross-venue funding carry, ADL is an easily missed risk.
The two legs hedge each other in theory. But if the profitable leg is deleveraged, the other one remains — leaving you naked and directional, in the middle of an extreme move. The consequence is identical to one leg being liquidated; only the trigger is reversed.
Note
Insurance fund sizes, ranking formulas and trigger conditions differ by venue and change over time. This describes the mechanism; consult the documentation of the venue you actually use for its specific rules.
Leveraged trading can lose your entire deposit. Nothing here is investment advice.
