There are two common ways to use margin in a trading account. Cross margin involves margin that is shared between open positions. Isolated margin, on the other hand, is margin assigned to a single position that is restricted from being shared.
Cross margin helps prevent quick liquidations and has a better capability to withstand portfolio losses. Isolated margin offers better flexibility in that other portfolio holdings will not be affected if a single position is liquidated.
What Is Cross Margin?
Cross margin was introduced in the late 1980s to reduce systematic risk in the market and to help traders better manage their portfolios when engaging in margin trading. At the institutional level, cross margin offsets the value of hedged positions maintained by firms at multiple clearinghouses. Cross margining recognizes intermarket hedged positions, thus it allows for reduced initial margin requirements, fewer margin variations, and smaller net settlements.
For individual traders, cross margin provides more leeway in how open positions in a portfolio move. Cross margin takes excess margin from one margin account and gives it to another to satisfy maintenance margin requirements. That sharing of margin allows the trader to use all available margin balances across their accounts.
How Does Cross Margin Work?
Cross margin is not a simple calculation, and it runs on sophisticated algorithms. By sharing margin across accounts, traders can access more exposure without depositing more capital. Clearinghouses, central counterparties, and brokers determine cross margin amounts and automatically move margin between accounts that have registered for the service. Traders might prefer cross margining, as a single losing position might not be liquidated quickly when market conditions change. Excess margin is transferred from another account to meet a minor shortfall in minimum maintenance. Cross margin helps to avoid quick margin calls and forced liquidations.
How to Use Cross Margin
Cross margin is best used when a trader has multiple margin trading accounts. A cash account and margin account work differently, and cross vs. isolated margin only apply to the latter type. For traders concerned about a single position being stopped out, it is generally better for them to use cross margin vs. isolated margin, as the former is a tool to help prevent unnecessary forced liquidations. So a trader must trade with a broker who offers this service.
Volatile markets demonstrate the benefits of cross vs. isolated margin. With cross margin, when there are extreme movements in single securities, it is hard to keep a handle on individual positions’ margin requirements. Cross margining can calculate amounts automatically and move excess margin to other accounts that need it.
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What Is Isolated Margin?
Isolated margin is the margin assigned to a single position that is restricted to a specific amount. When the allocated margin drops below an unrealized profit and loss threshold or the maintenance margin requirement, the position is automatically liquidated. The upshot is that other positions in the account are not affected. Isolated vs. cross margin offers better flexibility because it can divide the trader’s funds, but stop-outs can happen quickly in volatile markets. Isolated margin vs. cross margin are different from each other, and both are used in crypto trading. It’s important to know what decentralized exchanges are when using either margin type when buying and selling crypto.
How Does Isolated Margin Work?
Isolated margin works by setting aside a margin amount for a single position. Volatile and speculative positions are sometimes good candidates for the use of isolated margin. It can be helpful when you don’t want other portfolio holdings to be impacted by a change in the value or margin requirements from that single position.
How to Use Isolated Margin
Traders have the flexibility to adjust their isolated margin amounts, which can be useful when managing their portfolio positions. You should consider isolated margin when you want more flexibility with a single position and seek to restrict a potential loss to only a small piece of your account. Isolated vs. cross margin can also require more nimble attention to the market, as you might need to actively adjust the isolated margin amount.
Cross- vs Isolated-Margin Compared
Let’s review the similarities and differences in cross vs. isolated margin. In general, cross margin is preferable for long-term strategies, as market- and single-asset volatility could always strike. Cross margin helps portfolios endure volatility with fewer automated stop-outs. The downside is that if there is an extremely volatile event, and liquidations occur, then total portfolio losses could be severe.
Similarities
Initial and maintenance margin rules apply to your account whether you use cross margin or isolated margin. The two strategies help to reduce the risk that your overall portfolio will experience fast liquidations.
Differences
The key difference between the two is that cross margin shares margin between positions and accounts. This can be a helpful feature for long-term investors and during periods of market volatility. Overall, cross margin can be a better risk-management tool for complex portfolios that consist of cryptocurrencies, options, and other derivatives.
| Cross Margin | Isolated Margin |
|---|---|
| Margin shared between open positions | Restricts margin to single positions |
| Reduces the risk of liquidations | Tighter liquidation thresholds — more stop-outs possible |
| Ideal when used with intermarket hedged positions, as margin requirements can be offsetting | Traders can actively manage margin amounts on single positions |
Advantages and Disadvantages of Cross Margin
| Cross Margin Advantages | Cross Margin Disadvantages |
|---|---|
| The entire portfolio can be used to margin a position, as excess margin is transferred from one position to another | Cross margin amounts cannot be adjusted like isolated margin amounts can |
| The available balance can be added to isolated holdings | Higher liquidation total portfolio losses if the market moves against the trader in an extreme way |
| Useful in a volatile market to avoid quick stop-outs | One position change can negatively impact other holdings |
Advantages and Disadvantages of Isolated Margin
| Isolated Margin Advantages | Isolated Margin Disadvantages |
|---|---|
| Liability is limited to the initial margin posted | Excess margin won’t be transferred to a losing position |
| Ideal for a single speculative position | Volatility can cause fast liquidations |
| Dividing funds between assets can reduce risk of major loss across a portfolio | Leverage can be adjusted quickly |
The Takeaway
It’s important that traders who engage in margin trading understand the concept of cross- vs. isolated margin. Cross margining is a feature that increases a firm’s or individual trader’s liquidity and trading capability by reducing margin requirements and lowering net settlement values. It provides flexibility when owning many positions. Isolated margin is the margin assigned to just one position — if it is liquidated, the account positions are not affected.
If you have the experience and risk tolerance and are ready to try out trading on margin for yourself, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.
FAQ
How is cross margin calculated?
In options trading, cross margin is calculated by clearinghouses and their clearing members, including prime brokerages that offer margining services. At the end of each trading day, organizations such as the Intercontinental Exchange and the Options Clearing Corporation (OCC) perform routing calculations and run reports for their clearing members.
Sophisticated algorithms calculate cross-margin levels. The OCC uses a program known as System for Theoretical Analysis and Numerical Simulations (STANS).
Is isolated margin the same as isolated leverage?
Isolated margin and isolated leverage are similar concepts. Isolated leverage is sometimes employed in cryptocurrency trading.
In isolated leverage mode, each cryptocurrency pair has a specific isolated margin account. Each margin account can only use margin on a specific trading pair.
What is the main benefit of cross margin?
Cross margining is when excess margin is transferred to another margin account to satisfy maintenance margin requirements. It allows traders to use their available margin balances across all their accounts. It makes it possible to have more exposure without extreme risk of liquidation should the market move against the trader.
Photo credit: iStock/Mirel Kipioro
*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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