FuturesHUB / Auto-deleveraging
Perpetual futures
Auto-deleveraging
Auto-deleveraging is the step after the insurance fund runs dry. The venue closes the other side of a bankrupt position by reducing winning traders, in rank order, at the bankruptcy price.
When it starts
A liquidation has already failed to cover the loser. The insurance fund has not covered the rest. Rather than write down every winner with a socialized loss, the venue selects opposing positions and closes them by the amount required. Those winners are taken out of a position they did not send an order to close.
The close happens at the bankruptcy price of the loser, which can be better than the market the winner would have clicked into a moment later, or worse. The point is that the winner does not choose the time.
How rank is usually built
A common rank combines profit and leverage. A position that is both highly profitable and highly levered is reduced first. A modestly profitable position at low leverage sits further down the queue. The specification publishes the formula, and the ticket sometimes shows your percentile in the queue.
The queue is a reason to care about leverage even on a winning position. The same unrealized profit at 3x and at 25x does not share a rank. Traders who want to stay out of the front of the queue keep leverage modest when the insurance fund is under stress.
What you can do about it
You cannot opt out of a contract's ADL if you hold the position. You can reduce leverage, take partial profit so the ranking profit falls, or close before a disorderly market if the fund balance is already thin. Each of those is a trade with its own cost.
After an ADL fill, the position is smaller and the realized profit is on the report. Hedge-mode positions can be reduced on one side. Re-read both sides before you assume the hedge is still balanced.
On the ticket
- Find the ADL ranking description on the contract and the indicator on the ticket.
- Check the insurance fund when the market is moving fast. A thinning fund is the preview.
- If you are near the front of the queue and you want to keep the position, reduce leverage or realize part of the profit.
- If you are deleveraged, record the bankruptcy price and the size. Then rebuild the position only if you still want it.
Questions
Does auto-deleveraging hit losers?
It hits the profitable opposing side. The losing side has already been liquidated. ADL is how the venue finishes paying for that liquidation when the fund cannot.
Can a low-leverage winner still be reduced?
Yes, if the queue reaches them. Rank usually puts high profit and high leverage first, so low leverage is further back, not exempt.