Margin madness – how fragmented markets are driving up trading costs

In today’s global capital markets, every trading firm wants to maximise profits while keeping costs low. But with so many trading options available, across exchanges and private deals, it’s becoming harder than ever to hold onto cash efficiently. Why? Well, it all comes down to the fact that markets are fragmented, and the cost of doing business keeps rising.

Before interest rates started to rise, traders could borrow more money to make their trades. Leverage levels were high, which meant firms could control large positions with relatively little cash up front. However, since rates started to climb in 2021, the demand for higher margin, the cash or collateral traders must post to cover potential losses, has skyrocketed.

Things have never been more complicated. Market volatility, fuelled by what seems like the start of a global trade war, will push margin requirements even higher. On top of that, new exchanges and clearing houses continue to flood the market, spreading traders’ positions across multiple platforms and reducing their ability to offset risks efficiently. As a consequence, the cost of trading continues to soar, leaving firms scrambling for solutions.

Traders and firms are realising that to stay competitive, they need to change their approach. It starts with incentivising smarter trading decisions and optimising where and how trades are placed. In the past, margin costs weren’t a big concern. Borrowing was cheap, and the extra cash needed for margin was just part of doing business. Unfortunately, with higher interest rates, margin costs directly impact profitability.

The challenge is that individual traders don’t always see the big picture. A trader might make a deal that looks great on paper but ends up costing the firm more in margin requirements. To fix this, firms need a system that fairly distributes margin costs across their teams — rewarding traders who make cash-efficient decisions and discouraging those who don’t. Nobody likes overpaying, and that includes traders. But knowing how to lower costs isn’t always straightforward. This is where optimisation comes in.

One of the biggest drivers of high margin costs is market fragmentation. With the same products being traded across multiple exchanges and brokers, firms can lose opportunities to offset risk and reduce their margin requirements. However, the very thing that causes high margin costs, multiple trading options, also presents an opportunity for savings.

By carefully choosing where to trade, firms can take advantage of lower margin requirements at specific exchanges, brokers or clearing houses. They can also strategically decide when to trade on an exchange versus making a private (bilateral) deal. For example, bilateral trades may require no upfront margin but come with higher counterparty risk, whereas cleared trades offer stability but require more cash up front. The key is finding the right balance.

Firms that adopt smart attribution and optimisation strategies have already seen big results — regularly cutting their margin costs by 30% or more. And beyond immediate savings, they gain the ability to forecast future funding costs, ensuring they stay ahead of market fluctuations.

With geopolitical uncertainties looming larger than ever, cash-efficient trading isn’t just a competitive advantage — it’s a necessity for survival. Firms that can master these strategies will be the ones that survive this new era of economic protectionism.