KCEX Auto-Deleveraging (ADL) Explained: Trigger Conditions, Ranking Rules, and Risk Management

Auto-Deleveraging (ADL) is an important risk control mechanism in perpetual futures trading. It is primarily used during extreme market conditions to handle liquidated positions that cannot be fully covered by the insurance fund. This article introduces the trigger conditions, execution process, profit and effective leverage ranking rules of the KCEX Auto-Deleveraging (ADL) mechanism, as well as methods for reducing the likelihood of being affected by ADL. It will help you understand how ADL operates and how it may affect your futures positions.

I. What Is Auto-Deleveraging?

Auto-Deleveraging (ADL) is an important risk mechanism in futures trading. When the market experiences extreme volatility, or when force majeure events cause the platform’s risk fund to become insufficient or decline rapidly, the system will activate the ADL mechanism to control overall risk.

The core logic of this mechanism is the forced liquidation of counterparty positions. Based on traders’ leverage and rate of return, the system ranks accounts according to specific rules and prioritizes the automatic deleveraging of accounts with higher leverage and higher profits. This helps protect the platform’s overall financial security and maintain market stability.

II. Auto-Deleveraging Execution Process

Understanding the ADL execution process can help traders better understand how this mechanism operates.

First, the system calculates a comprehensive profit ranking based on the rate of return and effective leverage. Traders who adopt more aggressive trading strategies and generate the highest profits will be prioritized and marked as deleveraging targets by the mechanism.

When severe market volatility causes some users’ positions to be liquidated while prices continue to deteriorate rapidly, the system may be unable to close the positions successfully after taking them over at the bankruptcy price. In this situation, funds from the platform’s insurance fund will first be used to cover these positions. If order book prices continue to deteriorate rapidly and the positions still cannot be closed at the new bankruptcy price despite receiving funding support, the ADL mechanism will be triggered.

After the ADL mechanism is triggered, the system automatically identifies counterparty accounts with the highest comprehensive profit rankings and directly trades with them at the bankruptcy price to complete the auto-deleveraging process. No manual intervention is required, as the entire process is executed automatically by the system.

III. ADL Ranking Calculation Logic

The ADL ranking is calculated strictly according to the following formulas, after which accounts are ranked to determine their comprehensive profit ranking:

Ranking Score = Profit Percentage × Effective Leverage (if profitable)
Ranking Score = Profit Percentage ÷ Effective Leverage (if incurring a loss)

Where:

Effective Leverage = Position Value ÷ (Position Value − Bankruptcy Value)
Profit Percentage = (Position Value − Average Entry Value) ÷ Average Entry Value
Position Value = Value of the position at the mark price
Bankruptcy Value = Value of the position at the bankruptcy price
Average Entry Value = Value of the position at the average entry price

IV. How to Reduce the Risk of Auto-Deleveraging

To effectively reduce the risk of being affected by the ADL mechanism, traders are advised to take the following measures:

(1) Control Leverage: Select an appropriate leverage multiple and avoid excessively high leverage, which may increase your ranking score.
(2) Take Profits in Batches: Lock in profits promptly to reduce the concentration of unrealized profits and lower the likelihood of being prioritized by the system.
(3) Set Take Profit and Stop Loss Orders: Set reasonable Take Profit and Stop Loss levels to avoid passive deleveraging during extreme market conditions.

KCEX remains committed to providing users with secure and efficient futures trading services. Thank you for your support!