When a trader’s position is liquidated, the position is taken over by the BigONE liquidation engine. If the liquidation cannot be filled by the time the mark price reaches the bankruptcy price, the ADL system automatically deleverages opposing traders’ positions by profit and leverage priority.
The price at which a trader's positions are closed out is the bankruptcy price of the initial liquidated order.
You can check your position in a queue presented by an indicator. This indicator represents your priority in the queue in 20% increments:
If all of the five bars are lit, it means your position is in the top 20%. In the case of a liquidation that is not able to be caught in the market, you may be deleveraged.
At BigONE, the Insurance Fund is used to prevent Auto-Deleveraging from occurring. If it is depleted for a given contract, Auto-Deleveraging will occur.
If you are deleveraged, a notification will be sent to you. Your open orders will be canceled, and you can re-enter the market later.
Priority Ranking Calculation
Deleveraging priority is calculated by profit and leverage. More profitable and higher leveraged traders are deleveraged first.
The ranking calculation is as follows:
Ranking = PNL Percentage * Effective Leverage (if PNL percentage > 0)
= PNL Percentage / Effective Leverage (if PNL percentage < 0)
Effective Leverage = abs(Mark Value) / (Mark Value - Bankrupt Value)
PNL percentage = (Mark Value - Avg Entry Value) / abs(Avg Entry Value)
Mark Value = Position Value at Mark Price
Bankrupt Value = Position Value at Bankruptcy Price
Avg Entry Value = Position Value at Average Entry Price
The system splits the positions by longs and shorts, and then ranks them from highest to lowest.
Auto-Deleveraging vs. Socialized Loss
BigONE employs an Auto-Deleveraging system as an evolution to the “Socialized Loss” system.
Socialized Loss systems have a few disadvantages:
A single risky trader can create a substantial loss for all traders, including low-risk traders.
Profit must be locked until rebalance or settlement in case of any losses.
The Auto-Deleveraging system aims to resolve loss uncertainty, allowing traders to make decisions as soon as the deleveraging event occurs, rather than wait for rebalance or settlement. Traders who become deleveraged will be immediately informed of their closeout price and size. They may then choose to re-enter the market.
Example of Auto-Deleveraging and the Ranking system
If within the trading system, there are six longs and their effective leveraged PNL has been calculated. The higher the PNL ranking, the higher the effective leveraged PNL.
Account Quantity PNL Ranking
1 10 3
2 10 6
3 20 1
4 30 4
5 20 5
6 10 2
The trading system will then rank these positions from the highest to the lowest and calculate the quintile related to each position.
Account Quantity PNL Ranking Percentage
2 10 6 20%
5 20 5 40%
4 30 4 60%
1 10 3 80%
6 10 2 80%
3 20 1 100%
When a liquidation happens, traders in the top percentiles will be deleveraged first. For example, if a short position has been liquidated with size 20 and bankruptcy price of USD 650, the following will happen:
Accounts 2 and 5 will be deleveraged at the bankruptcy price of USD 650. Account 2 will have their entire position of 10 contracts closed, while the remaining 10 contracts from the short liquidation will be assigned to account 5.
Account 5 will thus have 10 contracts remaining (from 20). Depending on his/her effective leverage, account 5 may or may not remain in the lowest quintile.
Both users will be notified and allowed to re-enter their positions.