The auto-deleveraging (ADL) system is a crucial feature that protects both traders and the exchange in the event of significant market movements. It works by automatically liquidating a trader's positions if their losses exceed their margin requirements. This ensures that traders don't lose more than they can afford and protects their investments. At the same time, it reduces the risk of traders defaulting on their loans and protects the liquidity of the market.
To achieve this, the ADL system continuously monitors the market prices and the positions of all traders. If the market moves against a trader's positions and their losses exceed their margin requirements, the ADL system will liquidate their positions. The OrangeX's liquidation engine takes over the liquidated positions.
In the event that the liquidation order cannot be filled by the market, the ADL system steps in to deleverage the counter party's positions based on their priority. Once a position is deleveraged, the owner receives a notification and an email regarding the relevant details.
ADL Counterparty Ranking
The ADL counterparty ranking helps traders understand their position in the queue. As long as a trader has an open position, there will be an indicator consisting of five bars. Each of the five bars indicates a 20% increment of the position in the queue. For instance, if three of them are lit, it means that this position is in the top 40% of the queue. The higher a position is in the queue, the more likely it will be affected by ADL.
The ADL ranking takes into account the mark price, average open price, position amount, and position leverage. Positions of higher leverage and unrealized PnL are of higher priority in the queue.
In summary, the ADL system is a win-win solution for both traders and exchanges. It protects traders from catastrophic losses while ensuring the liquidity and stability of the market. The ADL counterpart's ranking provides transparency and helps traders understand their position in the queue, allowing them to make more informed decisions.