About Automatic Deleveraging (ADL)
When investors are forced to liquidate their positions, their remaining positions will be taken over by BKEX’s forced liquidation system.
If the forced liquidation position cannot be closed in the market, and when the mark price reaches the bankruptcy price, the automatic position reduction system will reduce the position of the investors holding the opposite position.
The order of ADL Ranking positions will be determined according to the leverage and profit ratio.
The automatic deleveraging will be performed according to the bankruptcy price of the forced liquidation position.
What is a liquidation loss?
Suppose a large trader uses 100 times leverage to hold a huge long position.
One day, due to a sharp drop in market price, the trader’s position is forced to close, resulting in a huge loss.
The liquidation loss refers to the loss of the position after the forced liquidation is executed, which is greater than the position margin used.
In order to make up for the loss of positions, the loss mechanism used by most trading platforms is a socialized loss sharing mechanism, which distributes the total loss of the contract to all profitable traders in proportion.
Disadvantages of the socialized loss sharing mechanism
The socialized loss sharing mechanism refers to the behavior of distributing the total loss of the contract to all profitable traders in proportion to fill the loss of the position.
In this mode, a single high-risk trader inflicts huge losses on all profitable traders, including low-risk ones.
Obviously, this is unfair to all market participants; why should other traders bear the huge losses caused by high-risk traders? If there is a large-scale liquidation event, it means that many traders will be affected.
What is Auto Deleveraging?
Auto Deleveraging in English means that when a trader has a forced liquidation, if the position cannot be liquidated at a price better than the forced liquidation price, and the balance of the insurance fund is not enough to cover The automatic position reduction system will reduce the positions of traders who hold positions in the opposite direction to ensure that the forced liquidation orders can be completed in a timely manner, so that the risk can be cleared as soon as possible to avoid further expansion of losses.
The working process of the automatic deleveraging mechanism
- The highest-ranked trader in the automatic deleveraging system will be selected by the system first;
- The automatic deleveraging ranking is determined according to the profit and loss of the position and the effective leverage used, that is, the more profitable and the more leverage used The higher the ranking, the higher the position;
- The selected position will be reduced at the bankruptcy price of the forced liquidation order;
- The reward of the liquidity provider will be given back to the selected trader, and the fee of the liquidity extractor will be triggered from
- Traders who have experienced automatic liquidation will receive an email/phone notification, and all active orders will be cancelled, and traders can freely re-enter the market for trading.
The advantage of the automatic position reduction system is different from other trading platforms.
BKEX adopts the ADL system, which automatically selects traders who hold orders in the opposite direction to lighten their positions according to the profit and loss percentage of the position and the effective leverage used.
This means that the smaller the profit percentage of the trader holding the position, the smaller the leverage used, the lower the probability of being automatically reduced.
Comparison between the automatic ADL Ranking mechanism and the socialized loss sharing mechanism
- Different from the socialized loss sharing mechanism, the total loss of the contract is calculated and distributed to all profitable traders in proportion. In the automatic deleveraging system, the positions are ranked according to the profit of the position and the effective leverage used, and the position is automatically reduced according to the order of the ranking, so low-risk traders have a lower probability of being automatically reduced, which is a kind of fairness to low-risk traders Assure.
- The socialized loss sharing mechanism needs to lock the realized profits until the contract settlement date. This mechanism is inflexible and inconvenient for traders. After an automatic deleveraging event occurs, traders can make trading decisions immediately without waiting until the settlement date.
- Traders can reduce the risk of being automatically reduced by reducing leverage or closing some profitable positions to solve the uncertainty of the socialized loss sharing mechanism.
How to reduce the risk of being automatically reduced.
Traders can reduce the risk of being automatically reduced by reducing leverage or closing some profitable positions.
- Reduce the position leverage level and reduce the ranking of automatic deleveraging in time;
- Close some profitable positions, although it will not lower the ranking of automatic deleveraging, it can reduce the number of contracts exposed to the risk of automatic deleveraging.
Automatic ADL Ranking
The position of a trader in the ADL queue is determined according to the profit and loss of the position and the effective leverage used.
The one with the highest ranking in the system will be selected by the system first.
Calculation of the automatic deleveraging queue sorting factor shows that the sequence of automatic deleveraging is determined by the automatic deleveraging queue sorting factor.
The calculation method of the sorting factor is as follows:
Sorting factor = profit percentage * effective leverage (if the contract is profitable) = profit percentage / effective leverage (if the contract is loss-making);
where profit percentage = (mark value – average opening value) / abs (average Opening value)
Effective leverage = ABS (Marked value) / (Marked value – Bankruptcy value)
Marked value = Position value at the marked price
Average opening value = Position value at the average opening price
Please check BKEX official website or contact the customer support with regard to the latest information and more accurate details.
BKEX official website is here.
Please click "Introduction of BKEX", if you want to know the details and the company information of BKEX.
Comment by Hans
April 24, 2024
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