haircut

Haircut

1. The difference between prices at which a market maker can buy and sell a security.

2. The percentage by which an asset's market value is reduced for the purpose of calculating capital requirement, margin, and collateral levels.

Investopedia Commentary

1. The term haircut comes from the fact that market makers can trade at such a thin spread.

2. When they are used as collateral, securities will generally be devalued since a cushion is required by the lending parties in case the market value falls.

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See also: Market Maker

haircut

A deduction in the market value of securities being held by brokerage and investment banking firms as part of net worth for calculating their net capital. The size of a haircut varies with the particular type of security held.