How Does a Centralized Exchange (CEX) Use Margin Trading in Financial Derivatives?
CEXs allow users to trade derivatives, such as perpetual futures, using borrowed funds, which is margin trading. The CEX acts as the counterparty or facilitator, providing the leverage and managing the risk.
Users deposit a small amount (initial margin) to control a much larger position. The CEX continuously monitors the user's equity against the maintenance margin and will automatically liquidate the position if the collateral falls below this threshold to prevent the CEX from incurring losses.
