Sorry— I’m late to the party having spent a bunch of time travelling to meet and run events with our community in Korea over the last couple of weeks.
However I have some significant reservations about using a change like this for what I understand to be the purpose described, so I will set them out here anyway. Whether that impacts the fate of this proposal or just provides food for thought for future changes, I’ll let y’all decide…
This parameter change doesn’t make a lot of sense to me, I don’t think it is the right way to achieve what seems to be a desired UX outcome in Console.
I read the main issue here as being that users are used to only being allowed to take half of the maximum leverage allowed for a position, so that there is a larg(er) buffer between the most leveraged opening state of a position and where it will be closed out. This has the impact that users who don’t understand their position well and pay attention to liquidation price may be surprised how little the price can move before they are liquidated, if they take close to the largest position their collateral will allow.
I see a few problems with using this proposed change to address that problem:
While it may seem reasonable at, say 40x leverage to be allocating a position at 20x, because that’s still a pretty small move to liquidation, it is less clear that it is reasonable to require positions on a market offering 2x leverage (for example) to be fully collateralised (which the 2.0 initial margin facotr implies).
This is not something that universally affects all traders in the same way. For example:
some traders take very short lived intraday positions and may value the capital efficiency of getting close to the maximum leverage allowed by the risk model;
a trader doing a pairs trade (or some other explicitly cross-margined strategy may expect to build offsetting margin against losses from gains in other markets, and ring-fencing so much initial margin could seriously reduce their capital efficiency;
algorithmic traders may calculate and adjust their siziing and leverage based on available data in order to maximise capital effiency within their risk tolerance, a strategy which would again be impacted quite negatively by this change;
The described problem sounds entirely like a UI/UX concern from the description above (“speculative traders on Vega get liquidated after a price move that is smaller than what they come to expect from trading on CEXs with the same initial leverage”). Given that Vega is general purpose market infrastructure and that this issue is explicitly affecting what sound like retail traders using a front end, it would seem more appropriate to solve the problem in front ends rather than imposing their preferred risk management strategy on all users across the entire system.
In fact, setting the initial margin at 1.5 was a conservative choice for the defaults programmed into the initial alpha release. Over time I would in fact imagine the community choosing to reduce this to say 1.1 (or even lower) to improve capital efficiency especially under cross margining.
Alternative front-end solution
This is what I’d suggest to do instead. It could be raised in the Console/front-end Github repo and should not be a difficult feature to implement.
While it’d be possible (simple, even) to have Console refuse to submit an order when the trader’s balance is less than 2x the maintenance margin, it might be better to allow such actions, but with a warning or hidden behind a setting.
Such a warning could require explicit consent (“Warning: you only have 1.6x the required maintenance margin for this position, check the box below to enable creating this order.”) or creating such positions could be disallowed entirely unless a trader goes into the settings.
Note also that once isolated margin is available, in that mode the initial margin is replaced by the isolated margin in that mode, and so a similar warning could be displayed when selecting the margin ratio/leverage.
Why not just increase the leverage?
One suggestion is for the community to increase the leverage by fiddling with risk parameters so that the leverage currently available at the 1.5 ratio initial margin could be made available once the ratio changes to 2.0.
This is not a great idea, because the actual leverage available to positions from a system and counterparty risk point of view is the leverage implied by the maintenance margin, not the initial margin. The maintenance margin is what is left to close out a liquidated position and so it’s the level that matters when it comes to keeping the system safe under liquidations.
In order to keep the system operating safely, markets should be created with risk parameters that are reasonable given the market-to-market frequency and the volatility of the market. If maintenance margin leverage is too high then loss-socialisation will occur more regularly and the insurance pool will not be maintained and grown over time.
When the maintenance margin is set reasonably, it’s also reasonable that some of the users types mentioned above may what to access the full leverage allowed by the margin level.
Happy to be corrected if I’ve fundamentally misunderstood or missed anything around the justification or purpose for this.
I personally would hope to see energy focused on an alternative solution and improving the UX for the affected subset of users, something which does not require a protocol change nor any adjustment to parameters, rather than this. I think this could be damaging in ways that would be hard to detect. If people just don’t use the system because of the implications to capital efficiency or their trading strategy of high initial margin, they may not tell anyone.
Let me know what you think…