Auto-deleveraging is a risk management mechanism applied when a position is closed with a negative equity. If a liquidated position can't be closed at a price higher than the bankruptcy price and the insurance fund is insufficient to cover the negative equity, CoinCatch's ADL system steps in. It automatically deleverages the position of the trader with the highest ranking at the bankruptcy price of the liquidated order.
Example:
Assume Smith has a long position of 10,000 contracts in BTCUSDT at a price of $20,000. Let's assume the liquidation price is set at $19,700 and a bankruptcy price at $19,500.
The mark price falls to $19,000 dramatically and the position gets liquidated. If Smith’s position is closed by the liquidation engine at $19,000, which is even lower than his bankruptcy price, his realized loss is more than the initial margin.
If Smith is trading with a traditional securities broker, he will be chased for the excessive loss. However, CoinCatch deploys capital from the insurance fund to cover such losses and Smith is not held liable. In case where the insurance fund is empty (or insufficient), the ADL mechanism is employed.
How Does the Auto-deleveraging Mechanism Work?
The ADL system identifies and prioritizes traders with the highest rankings for deleveraging. These rankings are determined by their highest profits and the leverage they employ effectively.
Subsequently, the system pairs the chosen profitable positions with liquidation orders. The trader responsible for covering the loss incurs a Maker fee, and the trader whose loss is covered receives a Maker fee rebate. Traders encountering an ADL will be notified via email or SMS and will see all their active orders closed.
Example
There are 3 short positions on the exchange
Traders Short position Ranking (PNL + Leverage) Precentile
|
Trader
|
Positions Held
|
ADL Ranking
|
|
A
|
10,000
|
1
|
|
B
|
7,000
|
2
|
|
C
|
3,000
|
3
|
To match Smith’s 10,000 liquidated long contracts, Trader A, who is ranked the highest in the ADL ranking system will have all the 10,000 short position contracts closed out at Smith’s bankruptcy price of $19,500. After that, his ranking will no longer be at the top percentile.
If there were a loss of 20,000 contracts, then Trader A's 10,000 contracts, followed by B's 7,000 contracts, and C's 3,000 contracts together would be selected, and will get auto-deleveraged at $19,500 in the price plunge. They would receive a notification that all their active orders are closed. They are then free to re-enter the market at their convenience.
The ADL system acts as a last resort, as most exchanges typically have an insurance fund that must be depleted before the ADL mechanism takes over.
Disclaimer
The above information is not financial advice but is provided for educational or entertainment purposes. Please conduct your own due diligence or consult a financial advisor before investing in any digital asset.
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