Automatic-Deleveraging: what it is and how it affects your positions
What is ADL?
Automatic-deleveraging (ADL) is the final liquidation process deployed to protect the OKX security funds when a fund isn’t able to further absorb additional bankrupted positions. Each product line may have one or more applicable security funds. The ADL mechanism applies to perpetual futures, expiry futures, and options trading positions.
Why is ADL necessary?
ADL acts as the last resort to protect these OKX security funds by deleveraging opposing profitable or highly leveraged positions (referred to as deleveraged positions), which promotes market fairness to users with less leverage. Deleveraging is achieved by matching and offsetting such deleveraged positions with bankrupted positions. ADL also helps maintain market stability and liquidity by automatically adjusting the positions from both sides, instead of relying solely on the order book.
When is ADL triggered?
ADL is triggered in either of the following instances as determined by OKX:
When the present value of an applicable security fund drops significantly lower than a certain preset threshold.
Applicable to crypto pre-market futures only: outstanding liquidation orders surpass a certain volume and time threshold.
What happens when ADL is triggered?
Positions in the ADL queue are ranked based on the leverage PnL% = position's PnL% × effective leverage. For example, positions with the highest positive leverage PnL% will be offsetted first, and vice versa.
In normal circumstances, deleveraged positions are forcibly closed at the mark price at the time of matching.
However, if the applicable security fund is nearly depleted, the deleveraged positions could be closed at bankruptcy price. The bankruptcy price is the estimated price the system uses when taking over a liquidation order. At that price, the residual value of the liquidated position is approximately equal to the maintenance margin balance.
Once a match between a loss-making position and an opposing deleveraged position is made, both positions are offset against each other and closed. This realizes the loss on the loss-making position and any profit on the deleveraged position.
Deleveraged positions won’t gain any further profit without you placing a new order into the order book. A key risk is that any new entry price for new orders may be different from the deleveraged positions’. While ADL can’t be entirely prevented, reducing leverage lowers the risk of your positions being affected.
How could I protect my hedged positions during ADL?
Delta-neutral strategy users can now create hedged positions by taking offsetting directions across spot, expiry futures, and perpetual futures with the same base cryptocurrency. For expiry and perpetual futures positions that are fully or partially hedged, the hedged portion of the position will be ranked lower in the ADL queue, reducing the likelihood of it being auto-deleveraged.To learn how to switch to delta neutral strategy and how we lower the ADL ranking of hedged positions for delta neutral strategy users, refer to the introduction of delta neutral strategy.
When does ADL stop?
ADL ends in either of the following circumstances as determined by OKX:
When the present value of an applicable security fund exceeds the preset threshold plus a buffer.
Applicable to pre-market futures only: the volume of liquidation orders falls below a certain threshold.
How do I know when ADL is going to occur?
Once there is risk shown in the security fund associated with your position, meaning the security fund balance falls below a defined threshold, the system will start calculating the position’s ADL exposure and indicate the ADL risk level by the number of warning lights. If there isn’t risk at the corresponding security fund, the system won’t compute the position’s ADL exposure, and the warning indicator will remain fully gray with no light shown for all associated positions.
Taking into account the ranking results from the leverage PnL% formula above, the cumulative total position size from the top-ranked position down to yours, and the total position size of all users, each position’s likely exposure to ADL is shown on the OKX Platform using a warning light indicator:
Five lights indicate the highest risk of the position being exposed to ADL, whereas one light indicates a lower risk. For example, if your position ranks first in this ADL warning mechanism, it will show five lights. If it ranks last, it will show only one light.
API users can also check their security fund balance and subscribe to the API ADL warning channel, which provides more information and warnings about ADL occurring.
Other than the above, no warnings are issued prior to ADL occurring. Once ADL occurs, an email notification is sent to impacted users detailing the relevant positions that were reduced.
Are any trading fees charged for ADL?
Trading fees are not charged on deleveraged positions, while liquidation fees apply to the liquidated orders.