How Does the Margin Requirement for a Futures Contract Influence the Effective Spread?
Margin requirements, the collateral needed to hold a futures position, influence the cost of trading. Higher margin requirements mean a higher capital cost for market makers.
To compensate for this increased capital expenditure, market makers may quote a wider bid-offer spread. Conversely, lower margin requirements reduce the capital cost, allowing market makers to quote a tighter spread.
Glossar
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.
Market Makers
Function ⎊ Market Makers in cryptocurrency, options, and derivatives markets actively provide liquidity by simultaneously offering to buy and sell assets, narrowing bid-ask spreads and facilitating efficient price discovery.
Futures Contract Influence
Pricing ⎊ Futures Contract Influence describes the significant effect that the price discovery on futures markets has on the spot price of the underlying cryptocurrency asset.