Margin trading

Margin trading means trades in which the broker provides part of the amount, while the cash and securities already held in the client's account serve as collateral. It lets you buy more than your own capital allows, or sell something you do not have in the account at all: the loan can be in cash or in the securities themselves. Access to this mode is granted by the broker under a separate agreement, and it is also the broker that decides which assets it accepts as collateral.

What the collateral is made up of

The broker does not value the portfolio directly at market value. Each asset is assigned a risk rate — a haircut for how far the price may move during the time needed to close the position. The value of the asset is reduced by this haircut, and the sum of the adjusted values forms the liquid portfolio — the figure against which the loan is extended. Two levels then come into play: initial margin determines what position the client is entitled to open, and minimum margin determines what position the client is allowed to hold. As long as the liquid portfolio is above the requirements, the position stays alive; this is the margin requirement, and the moment when the portfolio falls below the minimum level is called a margin call. The size of the haircut depends on how quickly the security can be sold without a noticeable shift in the quote, so the liquidity of the asset directly determines how much leverage will be offered against it.

Example: what is accepted as collateral

A security of this size and turnover receives a low risk rate: it can be sold quickly without wrecking the price, and it supports a large margin position. For a third-tier issuer the haircut is noticeably larger, and some securities are not accepted as collateral at all — the market is too thin for the broker to count on being able to exit the collateral. That is why a purchase of the same cash amount gives a different safety margin depending on what is held in the portfolio.

Where the term is misunderstood

The main mistake is to treat the size of the leverage as the measure of risk. Leverage sets only the scale; the probability of a forced close-out is determined by the volatility of the collateral and by the speed at which the position can be unwound. Second: the concept does not apply to the derivatives market. A futures contract is not bought with borrowed money — what applies there is the collateral deposit built into the contract itself, and no margin lending arises. Finally, a short sale is always a margin trade, even if the account carries not a single rouble of cash debt: it is the securities that have been borrowed.