Glossary
ADL is the forced reduction of profitable opposing positions when a liquidation cannot be filled without a deficit.
In short
Auto-deleveraging is the backstop after liquidation: when a bankrupt position cannot be closed in the market without creating a shortfall, the venue reduces opposing positions — typically the most profitable and highest-leverage ones — to keep the system solvent.
ADL is the one mechanism that can take away exposure you wanted to keep, precisely when you were right. It appears during violent moves, which is when a correct position is most valuable.
It cannot be avoided by good risk management, only made less likely by holding less extreme leverage in stressed markets.
Questions
It closes a position early, so it removes future upside rather than realising a loss.
No. It is a venue-level solvency mechanism.
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