Leverage Decay (J-factor)

Automated exposure management

As markets approach resolution, liquidity often thins on the losing side, open interest concentrates, and the potential for discontinuous price moves increases. The period where a market can gap or resolve without crossing intermediate prices, such as the moment an election is called or an announcement drops, is the hazard window.

J-factor is Multiply's systematic leverage decay mechanism. It progressively reduces facility exposure to zero before the hazard window begins, ensuring the Capital Providers never holds a position into settlement and protects its principal at all times.

How J-factor works

At position entry, Multiply computes a de-risking schedule based on:

• Time-to-resolution: How long until the market's hazard window begins

• Microstructure: Current and historical liquidity patterns, including concentration, spread, depth, order book imbalance, and fill rates as resolution approaches

This schedule defines the maximum allowable leverage at each point in time between entry and resolution. Deleveraging parameters and thresholds are fixed at entry. Their execution is triggered by live market data, including price movements, order book depth, time-based conditions, and open interest microstructure. These real time signals determine when and if predefined thresholds are met, triggering various phases of the deleveraging schedule.

As the position ages:

• Maximum leverage declines along the predetermined curve

• When the position's current leverage exceeds the new maximum, Multiply automatically reduces exposure

• The corresponding hedge is unwound proportionally

By the time the hazard window begins, levered exposure has reached zero. The user retains residual unlevered position, but no Facility capital is at risk of settlement-driven loss.

Balancing exposure and risk

Multiply consistently resolves the trade-off between allowed exposure and risk surface in favor of keeping risk within predefined bounds. J-factor is calibrated to be protective without being punitive.

In observed operation:

• Users on winning-side positions are able to express up to 80% of their initial leverage intent through resolution, capturing the majority of their expected PnL despite decay

• Users on losing-side positions benefit from J-factor as a de-risking mechanism, systematic deleveraging reduces the probability of immediate full principal loss by scaling down exposure as the position moves against them

J-factor is a shared protection that benefits both the user (reduced tail risk and lower borrowing cost) and facillity (no settlement exposure).