How Auto-Deleveraging Selects Profitable Positions After Insurance Funds Run Out
Summary
The document explains auto-deleveraging (ADL) as an exchange mechanism for covering liquidation losses that remain after an insurance fund is insufficient. It contrasts ADL with socialized loss allocation, which spreads a shortfall across profitable traders, and describes ADL as selecting opposing profitable positions according to profit and effective leverage. A higher ranking increases the chance that a position will be reduced.
A worked example follows a liquidated long whose execution price falls below its bankruptcy price, leaving a shortfall. The exchange first uses its insurance fund; if that cannot cover the loss, it reduces selected short positions at the bankruptcy price, beginning with the highest-ranked trader. The article says active orders are closed and notifications are sent after ADL. The example is illustrative rather than evidence of exchange-wide outcomes, and exact rules can vary by venue.
Key ideas
- ADL is a backstop for liquidation losses that an insurance fund cannot cover.
- The described ranking prioritizes profitable opposing positions with higher effective leverage.
- A worked example shows a short position being reduced to cover a liquidated long’s deficit.
- Traders selected for ADL may have active orders closed and receive a notification.
- ADL mechanics and selection rules can differ across exchanges.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.