ADL Mechanism Used by Exchanges to Close Profitable Positions During Volatility

Crypto exchanges have been using an automated system to forcibly close profitable positions during extreme volatility. This mechanism, known as Automatic Deleveraging (ADL), is designed to help safeguard the platform by balancing losses across the system.

When a sharp price swing occurs and collateral drops below a maintenance margin, the traditional auto-liquidation system kicks in. However, ADL is triggered when the exchange's insurance fund cannot support deficits. In this scenario, ADL selects profitable positions on the opposite side of the defaulted contracts and forcibly closes them.

The ADL mechanism ranks accounts based on several criteria, including unrealized profit percentage, effective leverage, position size, and margin ratio. Traders with high profits and significant leverage often end up at the top of the list. This means that even profitable trades can be closed during periods of extreme volatility.