Position-size limits measured against traded volume

A dollar cap is a fixed line. A volume-based cap is not, because the quantity it measures against is recomputed from the market every day.

The rule is usually stated as a maximum number of days to liquidate. A pledged position may not exceed, say, three days of selling at the lender's assumed participation rate; anything beyond that is credited at zero. Since the assumed daily capacity is a fraction of a trailing average of traded volume, the cap breathes with the market.

This creates a limit that tightens on its own. Trading volume in a single name is not stable; it can halve over a few quiet weeks with no news at all. When it does, every pledged position in that name gets longer to liquidate, and positions that sat comfortably inside a three-day cap move outside it without a share changing hands.

There is a second effect hidden in the trailing window. Because the average is taken over twenty or thirty days, a single unusually heavy session can hold a position inside the cap for weeks after the activity that caused it has gone, and the position then drops out of compliance on the day that session rolls off the back of the window. Nothing happened on that day. A number simply left the calculation.

Volume falls fastest in the markets where a lender most wants to sell. A cap written in days is therefore at its tightest precisely when it is being tested.