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Auto Deleveraging (ADL)

6 months ago

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Greetings from MCS, the derivatives trading platform where traders ALWAYS come first.

Today's topic is "ADL(Auto Deleveraging)".

Contract Loss Mechanism Overview

When the mark price reaches the trader's liquidation price, the liquidation engine overtakes and closes the position. As the liquidation occurs, the engine aims to prevent loss of the position by closing at the bankruptcy price. However, in volatile or non-liquid markets, contract losses may be caused due to an inevitable close at a price worse than the bankruptcy price. In general, when these contract losses occur, positions are managed by the contract loss mechanisms, including socialized loss and auto deleveraging (ADL) systems.

MCS implements the auto deleveraging system as the contract loss mechanism as it is more benevolent to many traders on the platform when considering socialized loss. In addition, MCS manages the insurance fund with flexibly and reliably to minimize auto deleveraging occurring.

 

Auto Deleveraging(ADL) vs Socialized Loss

Socialized Loss

Socialized Loss is a mechanism where all the traders on the platform compensate for a contract loss. If the insurance fund does not cover the contract loss, the socialized loss is triggered. This means that a single risky trader with high leverage will cause risk to all traders with positions on the platform, including low risk/risk averse traders.

Auto Deleveraging (ADL)

Auto Deleveraging (ADL) is a contract loss mechanism that is activated when a contract loss occurs and the insurance fund is not sufficient to compensate for the loss. If ADL is triggered, the trader's position will be compensated by auto deleveraging the positions of traders with high ADL ranking. The system therefore only affects some of the traders who use high leverage and/or have high returns. This protects other traders who use low risk and low leverage from being harmed by a single risky trader.

 

Auto Deleveraging Example

Chalse goes long 10,000 BTC/USDT contracts at 9,000.50 USDT with 10x leverage and has a liquidation price of 8,373 USDT.

 

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Long Position Bankruptcy Price = (Avg. Entry Price × Leverage) / (Leverage + 1) = 9,000.5 × 10 / (10+1) = 8,182.27273 USDT≈8,183 USDT

The position is auto deleveraged if the liquidation engine fails to settle for a price better than 8,183 USDT (bankruptcy price) and the loss from the position cannot be covered by the insurance fund.

Assuming six short positions as shown in the table below, traders will be auto deleveraged in the order of their ADL ranking. Positions selected for ADL are deleveraged at Trader A's bankruptcy price.

 

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According to the table above, Trader A's ADL ranking is the highest, therefore 10,000 BTC/USDT contracts are matched at 8,183 USDT (bankruptcy price of the position being liquidated) and the remaining 200 contracts remain in position. After auto deleveraging, Trader A has a relatively small number of contracts with the same margin, which lowers ADL Ranking. Similarly, if 15,000 contracts are to be auto deleveraging, traders A, B, C and D will all be selected. Positions selected for ADL will receive a maker rebate and the liquidated position will pay the taker fee.

Traders can view their ADL Ranking to manage their own risk of being auto deleveraged and reduce ADL Ranking by decreasing leverage used or by closing some of the positions. If a trader is auto deleveraged, they will be notified and all active orders will be canceled automatically. After the ADL, the trader receives a maker rebate and can freely reenter the market.

 

   

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Published 6 months ago