Auto-deleveraging, or ADL, is an exchange mechanism that forcibly reduces selected opposing positions when its liquidation risk process reaches specified limits. It helps resolve exposure that ordinary liquidation and designated financial buffers cannot handle within the venue’s rules. The selected trader need not be the trader whose margin originally failed.
When and whom it affects
Triggers vary. They can involve insurance-fund depletion, a fund drawdown threshold or a limit on the exposure the fund can support. ADL therefore need not wait until a fund balance is zero.
Selection commonly uses a ranking based on profitability and effective leverage. Profitable positions may receive priority, but some systems can also select losing opposing positions. An ADL indicator describes relative queue status under a particular model, not a guaranteed probability of reduction.
A forced close with different consequences
A selected position can be reduced partly or fully without the holder’s chosen exit order. Execution may use a rule-defined bankruptcy or matching price rather than the current market price. Pricing, fees and notification procedures differ by venue.
The reduction realizes a result and removes some market exposure. If the position was part of a hedge, the remaining portfolio may become unbalanced. ADL is therefore relevant even to a profitable account with sufficient margin; it is distinct from that account’s own margin liquidation.