Why Does an Exchange Require a Higher Margin for a Larger Position?
An exchange requires a higher margin for a larger position due to the increased systemic risk. A large position has a greater market impact upon liquidation, increasing the probability of significant slippage and a negative balance.
By requiring a higher initial and maintenance margin percentage, the exchange creates a larger financial buffer to absorb potential losses, protecting its insurance fund and the overall market stability.
Glossar
Tiered Margin System
Leverage ⎊ A tiered margin system within cryptocurrency, options, and derivatives trading dictates the amount of capital required to maintain a position, scaling inversely with position size; this structure directly influences trading leverage, impacting both potential profitability and risk exposure.
Insurance Fund
Mitigation ⎊ An Insurance Fund, within cryptocurrency and derivatives markets, functions as a capital reserve designed to absorb losses stemming from systemic risk or counterparty default, particularly relevant in decentralized finance (DeFi) protocols.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.
Financial Buffer
Mitigation ⎊ A financial buffer within cryptocurrency, options, and derivatives contexts represents preemptive capital allocation designed to absorb adverse price movements or unexpected margin calls.
Higher Margin
Leverage ⎊ Higher margin profiles in cryptocurrency derivatives necessitate a nuanced understanding of leverage mechanics, particularly concerning initial and maintenance margin requirements across exchanges.
Market Impact
Influence ⎊ The concept of market impact, within cryptocurrency, options, and derivatives, fundamentally describes the price change resulting from a trade.