ADL (auto-deleveraging): what it is and how to protect an arbitrage trade

ADL (auto-deleveraging): what it is and how to protect an arbitrage trade

Most traders fear liquidation, but there is a mechanism that closes positions even for those who are in profit. It is called ADL, and for an arbitrage trader it is sometimes more dangerous than an ordinary stop-loss.

We look at how auto-deleveraging works, why it hits precisely the profitable trades and what to do so that your trade is not left without a hedge.

What ADL is on a crypto exchange

ADL, or auto-deleveraging, is the forced reduction of profitable traders' positions. The exchange closes them to cover the loss from a liquidated position that could not be closed at a normal price.

Usually it does not come to that. ADL is the exchange's last line of defense, and it only kicks in under extreme conditions.

When ADL kicks in

When a trader's position is liquidated, the exchange tries to close it in the market. If the price has moved too far and the close is executed worse than the bankruptcy price, the insurance fund covers the difference.

The insurance fund is replenished from the leftovers of successful liquidations. But in a crash, when liquidations come in an avalanche and the order book empties out, the fund may not be enough.

That is exactly when ADL kicks in. The loss that no one is left to cover is shifted onto the opposite side: onto traders who are profiting from the same move.

This is what happened during the crash of October 10, 2025, when ADL was triggered on a number of venues. From what we see, many arbitrage traders then saw for the first time how a hedge leg gets closed without their involvement.

Who ADL hits first

Exchanges build a deleveraging queue. The general principle is the same on most venues: those with larger unrealized profit and higher effective leverage are higher in the queue.

The formulas differ, but the logic is clear. The more a position has earned relative to its margin, the sooner it is used to cover someone else's loss.

How to read the ADL queue indicator

Many exchanges show your place in the queue right next to an open position. It is usually a scale of several bars or lights: the more of them are lit, the closer the position is to the front of the queue.

The indicator updates with price and leverage. It is worth checking in every session, not only on days of strong moves, because by the time of a crash it is too late to change anything.

Why ADL is dangerous for an arbitrage trader

An arbitrage trade depends on the balance of two legs. If ADL closes one of them, the other is left as a naked position, open at the most volatile moment in the market.

Let's look at a hypothetical example with textbook numbers. You hold 1 BTC on spot and a 1 BTC perpetual short at a price of $60,000, and the price drops sharply.

The short is in profit, and with high leverage it quickly climbs the ADL queue. The exchange reduces it by 0.6 BTC, and you are left with an unhedged 0.6 BTC long.

If the price falls another 4%, the loss on the open part will be about $1,440. You will receive the profit on the closed portion of the short, but the trade is no longer neutral, and the calculated spread is lost.

In our view, the worst part here is not even the loss but the surprise. While the trader is figuring out what happened, the market keeps moving against the remaining leg.

How to protect a trade from ADL: a checklist

You cannot rule out ADL completely, but it is quite realistic to reduce the chance of ending up in the queue and to restore the hedge quickly.

• Keep moderate leverage on the perp leg: the lower it is, the further back the position is in the queue.
• Watch the ADL indicator and reduce the position when it approaches the maximum.
• Take partial profit on the winning leg and rebalance the trade after strong moves.
• Keep free margin so you can reopen the hedge immediately if a leg is reduced.
• Set up notifications for position closures so you learn about ADL within seconds, not an hour later.
• Spread large size across several exchanges so that ADL on one does not break the whole setup.

We believe the last point is underrated. A trade spread across venues is harder to track, but a failure on one exchange does not wipe out the whole result.

What to do if ADL has already been triggered

First, assess what part of the trade is still open. Then decide whether to reopen the hedge on the same exchange, on another venue or close the remaining leg entirely.

The key is not to wait. A naked position in a crash quickly eats everything the trade earned over weeks of calm operation.

Our tools

When ADL closes one leg, the hedge has to be reopened urgently, and the fastest way to do that is to see prices and funding on all exchanges at once. Our arbitrage screener keeps dozens of venues in one window, refreshes quotes every second and shows each gap together with the volume actually behind it. The spread calculator helps you check what survives fees, network costs and slippage at your size. The bot is fully manual. It never connects to your exchange API keys.

To test the tools on a live market, ArbitrageScanner offers one day of free access to the whole ecosystem.

FAQ (Frequently Asked Questions)

1. What is ADL on an exchange?

It is auto-deleveraging. The exchange forcibly closes part of the profitable positions to cover the loss from a liquidation that the insurance fund could not cover.

2. When does auto-deleveraging kick in?

When a liquidated position was closed worse than the bankruptcy price and the insurance fund is not enough to cover the difference. This usually happens during sharp crashes.

3. Who does ADL close first?

As a rule, positions with the largest unrealized profit and the highest leverage. Each exchange has its own exact formula.

4. How do I find my position in the ADL queue?

Many exchanges show an indicator next to an open position: a scale of bars or lights. The more of them are lit, the closer you are to being deleveraged.

5. Can you fully protect yourself from ADL?

No, but you can reduce the risk. Moderate leverage, partial profit-taking, a margin buffer and position closure notifications all help.

6. Why is ADL dangerous for an arbitrage trade?

It closes one leg, and the other remains open without a hedge. In a crash, such a position loses money quickly.

Conclusion

ADL kicks in when the exchange's insurance fund cannot cover liquidation losses, and it hits the most profitable positions with high leverage. For an arbitrage trader, this is the risk of being left without a hedge leg at the worst possible moment.

Protection is built from simple habits: moderate leverage, keeping an eye on the queue indicator, taking profit, a margin buffer and being ready to reopen the hedge quickly. Then even a position reduction will not turn your trade into a directional bet.

IMPORTANT! We are software developers. We do not give recommendations or promises of earnings and we do not advise you to invest your money anywhere. Our software is fully manual, all your money stays under your own control. We show examples of how our clients have earned on arbitrage in the past, but we do not advise repeating those actions one to one. Your earnings depend solely on your own actions and on market factors.