Cryptocurrency exchange Kraken has added a new feature to its margin trading service called “Position Settlement”. The feature provides users with the option to “cash out” of margin positions.
Position settlement automates closing out a position Kraken, something that previously could only be done manually. A leveraged margin position is a spot trade executed through an advance financed by Kraken. For example, a long bitcoin (BTC)/EUR position is opened by advancing the trader EUR to buy bitcoins in a spot trade. And a short BTC/EUR position is opened by advancing the trader BTC to sell for EUR in a spot trade. To close the position, the funds advanced to the trader must be returned to Kraken. One way to return the funds is by executing an opposing trade to acquire the advanced asset from the market – a sell order to close a long position or a buy order to close a short position.
A new way on Kraken to return the advanced funds directly from the trader’s account balance with no trade involved is position settlement. Returning the advanced funds in settlement effectively replays the trade from a trader’s own balance. Upon completion of a position settlement, the trader will have swapped out Kraken’s advance for his or her own assets. Thus, position settlement effectively allows Kraken’s clients to close all or part of a position by buying or selling at the same price the margin position was opened at.
There are two main benefits of position settlement. First, it permits users to lock in a buy or sell price before they have deposited the full amount of funds to complete the transaction. This is especially useful for profiting from a move in the market that may happen before your deposit arrives.
Kraken highlights an example:
You only have EUR in your account but want to sell some bitcoins from your private wallet. You can lock-in a price for selling the bitcoins before depositing them to your account by creating a short position then settling the position by selling the deposited bitcoins at the previously locked-in price. Or suppose you only have bitcoins in your account and want to buy more before your next bank deposit arrives. You can do this by creating a long bitcoin position at your desired price and settling the position at this price after the bank funds are credited to your account.
The second benefit of position settlement is that it permits traders to carry on a trade longer than they normally would with a margin position.
The exchange operator provides another example:
You have a long bitcoin position and it is nicely profitable. If you don’t want to keep the margin position open much longer (say to avoid further margin fees), you can convert the margin position to a bitcoin balance and let the trade ride that way as long as you want – simply buy the bitcoin at the original position execution price using the fiat currency in your account balance.
According to Kraken, osition settlement is executed with a special order type. It is found only in the advanced order form UI, as “Settle Position”, or through Kraken’s API, as “settle-position”.
To settle a long position, users create a Buy Settle Position order. In the example below, a Buy Settle Position order for 5 bitcoins is created. The bitcoins will be bought using EUR funds from the account at the price the position was opened at.
To settle a short position, users create a Sell Settle Position order. In the example below, a Sell Settle Position order for 500 ethers is created. 500 ethers from the account will be sold in return for bitcoins at the price the position was opened at.
Interestingly, the service is free from Kraken. Since position settlement does not involve a spot trade, naturally there is no fee associated with paying off the advance and closing a position in this manner.