How Does the Exchange Dynamically Adjust Maximum Allowable Leverage?
Exchanges dynamically adjust the maximum allowable leverage primarily based on the asset's volatility and the trader's position size (tiered margin). If an asset experiences extreme volatility, the exchange will lower the maximum leverage to reduce systemic risk.
Similarly, for larger positions, the maximum leverage is reduced to ensure that the required margin provides a sufficient safety buffer against potential losses, protecting the exchange and the insurance fund.
Glossar
Order Book Depth Influence
Metric ⎊ Order book depth is a critical market microstructure metric representing the total volume of outstanding limit orders available at various price levels away from the current best bid and offer.
Position Size
Allocation ⎊ Position size, within cryptocurrency and derivatives markets, represents the proportional capital commitment to a specific trade or investment relative to total available trading capital; it’s a fundamental risk management parameter directly influencing portfolio volatility and potential drawdown.
Maximum Leverage
Amplification ⎊ Maximum leverage, within cryptocurrency and derivatives markets, represents the utilization of borrowed capital to increase the potential return of an investment, fundamentally altering risk-exposure profiles.
Maximum Allowable Leverage
Constraint ⎊ The Maximum Allowable Leverage, within cryptocurrency derivatives and options trading, represents the upper boundary of leverage permitted by an exchange or broker, fundamentally limiting the potential amplification of both gains and losses.
Dynamic Leverage
Calibration ⎊ Dynamic leverage, within cryptocurrency derivatives, represents a continuously adjusted exposure relative to underlying asset movements, differing from static leverage ratios.