Auto-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.
What should I do to reduce the ADL risk of my positions?
Add margin to lower account effective leverage
Reduce positions to lower the maintenance margin requirement
Prioritize trading major coins and contracts with deeper liquidity
Use Delta‑Neutral Strategy and ensure positions are fully hedged. 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 Introduction to 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?
Users can reference the estimated ADL probability of each position via the ADL indicator light. There are 1 to 5 bars on the ADL indicator light; more filled bars indicate a higher probability of ADL.
Taking into consideration of 1) the ranking result from the above leverage PnL% formula, 2) cumulative total position size from the top-ranked position down to the user's position, and 3) the total position size of all users, each position's likely exposure to ADL is determined shown on the OKX Platform using a warning light system :
Five lights indicate the highest risk of the position being exposed to ADL, whereas one light indicates a lower risk. For example, if you have a position ranking as the first in the ADL warning light queue, the warning light of your position would show five lights, but if you have a position ranking as the last in the ADL warning light queue, the warning light of your position would show only one light.
Users can check Security Fund balance via API, and subscribe to the ADL Triggering API channel which provides certain information and warnings about ADL occurring.Other than the above, no warnings are issued prior to ADL occurring. Upon ADL occurring, an email notification is provided to affected users with details of the relevant positions closed.
Are any trading fees charged for ADL?
Trading fees are not charged on deleveraged positions, while liquidation fees apply to the liquidated orders.