A venue forcibly closing profitable traders' positions to cover losses it cannot otherwise absorb, used when the insurance fund is exhausted.
If a bankrupt position cannot be closed in the market and the insurance-fund cannot cover the shortfall, someone on the other side has to give up their gain. ADL ranks traders by profit and leverage and closes the highest-ranked first, at the bankruptcy price.
It means a correct, profitable trade can be terminated through no fault of your own, exactly during the violent move you positioned for. Venues display an ADL indicator showing your place in the queue, and most traders discover it only when it happens.
It is a structural argument for venue choice and for lower leverage: high leverage on a winning position raises your ADL ranking. It is also a reminder that a derivatives position is a claim against a venue's risk system, not an entitlement.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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