Auto-Deleveraging (ADL)

The Liquidation Waterfall

A position becomes liquidatable when margin falls below the maintenance requirement, and the venue's engine tries to close it on the order book. Two prices matter. There is the price the order actually fills at, and there is the bankruptcy price, the level at which the losing trader's margin is exactly zero and there is nothing left to take.

Fill better than the bankruptcy price and the surplus goes to the insurance fund. Fill worse, or fail to fill at all, and the fund covers the shortfall. That fund is the thing standing between one trader's bad afternoon and everybody else's profits.

When the Fund Cannot Take the Position

Auto-deleveraging starts where the fund stops. Binance describes it as the final step, occurring when the insurance fund is unable to accept a bankrupt position.

Read that wording carefully, because it does not say the fund is empty. A fund with a perfectly healthy balance can still be unable to swallow one position that is simply too big, and funds are held per collateral asset rather than as one comforting communal pot.

Who Gets Closed, and in What Order

The engine works down a queue of traders holding the opposite side. Binance ranks them by profit percentage multiplied by effective leverage, so the most profitable and most leveraged accounts go first. Being right, in size, moves you towards the front. Each trader can see an indicator of roughly where they sit, which is the closest thing to a weather warning this corner of the market offers.

The settlement price is venue specific, and this is where assumptions get expensive. Binance closes the position at the bankruptcy price of the liquidated trader. Hyperliquid uses the previous mark price and ranks by its own formula. Do not carry a habit from one venue to another.

Why This Matters to a Careful Trader

The instinct is to read auto-deleveraging as a punishment for recklessness. It is the exact opposite. Your margin was fine, your thesis was correct, your risk management was textbook, and your position was closed anyway because a stranger on the other side blew up and the backstop could not cover the hole.

The practical rule: if you are sitting on a large, highly profitable, highly leveraged position, treat the venue's queue indicator as live information rather than decoration, and remember that taking profit yourself is the only method guaranteed to work. Reducing leverage moves you down the queue. Being right, unfortunately, moves you up it.