Leverage and Position Limit

Overview

Risk limits are a core risk management mechanism designed to control the exposure of individual traders, particularly in highly volatile markets. Without such constraints, a trader holding a large position with high leverage could pose systemic risks and experience significant losses.

To manage this, the system implements dynamic leverage, where the maximum allowable leverage decreases as the position size increases.

Dynamic Leverage Explained

• The larger the position value, the lower the maximum leverage available to the trader.

• Conversely, higher leverage selections automatically reduce the maximum allowable position size.

This creates a balanced trade-off between risk and exposure, helping to ensure market stability.

Mechanism Summary

Let:

• L_max​: Maximum allowable leverage

• P_size​: Trader’s current position size

Then:

• As P_size↑, → L_max↓

• As L_chosen↑, → P_max↓

This relationship ensures that:

$$L_{\text{max}} = f(P_{\text{size}}) \quad \text{and} \quad P_{\text{max}} = g(L_{\text{chosen}})$$

Where f and g are decreasing functions reflecting the inverse relationship between leverage and position value.

Why This Matters

This approach helps:

• Prevent market manipulation

• Mitigate liquidation risk

• Maintain platform integrity during high-volatility periods

It protects both the trader and the broader market from the negative impact of oversized, over-leveraged positions.