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 insurance funds when an OKX insurance fund is not able to further absorb additional bankrupted positions. Each product line may have one or more insurance funds applicable to it ("Applicable Insurance Fund"). The ADL mechanism applies to Perpetual Futures, Expiry Futures and Options trading.
Why is ADL necessary?
ADL acts as the last resort to protect these OKX insurance funds by deleveraging opposing profitable or highly leveraged positions ("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 replying solely on order book.
When is ADL triggered?
ADL is triggered in the following instances as determined by OKX:
When the present value of an Applicable Insurance Fund drops significantly lower than a certain preset threshold or;
Applicable to Crypto Pre-Market Futures only: outstanding liquidation orders surpass a certain volume and time threshold.
What happens when ADL is triggered?
Deleveraged Positions are ranked based on the leverage PnL% = position's PnL% * effective leverage (e.g., 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 Insurance Fund is nearly depleted, the Deleveraged Positions could be closed with bankruptcy price (approximately a price level at which a position loss equals the margin required).
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 realises the loss for the loss-making position, and realises any profit for the Deleveraged Position.
The Deleveraged Positions cannot gain any further profit without the user entering 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 it is not possible to eliminate the possibility of ADL being triggered, reducing leverage reduces the possibility of your positions being affected by ADL.
When does ADL stop?
ADL ends in the following circumstances as determined by OKX:
When the present value of an Applicable Insurance Fund exceeds the preset threshold above plus a buffer or;
Applicable to Crypto Pre-Market Futures only: the volume of liquidation orders falls below a certain threshold.
How can I predict when ADL is going to occur?
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.
Users can also 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 the Deleveraged Positions. Liquidation fees are charged on the loss-making position.