Auto-Deleveraging (ADL) is a risk management mechanism used by some cryptocurrency derivatives exchanges, including BitMEX, to prevent liquidation events in highly volatile markets. When traders on the platform open positions using leverage, they must post margin as collateral for their positions. If the market moves against them and their margin falls below a certain level, their position will be liquidated to avoid the risk of default.
In the case of ADL, if the platform’s liquidation engine is unable to liquidate a trader’s position due to insufficient liquidity, the system will automatically deleverage the trader’s position by closing a portion of their position starting from the highest leveraged position until the necessary liquidity is achieved. This means that traders with the highest leverage and biggest losses will be closed first.
While ADL can help protect traders from being liquidated in extremely volatile markets, it can also result in unintended losses for traders who are not highly leveraged or are not in loss-making positions. Therefore, it is important for traders to understand the risk management mechanisms in place on their trading platform and manage their positions accordingly.