Understanding Price Marking and Types of Prices in Contract Trading

Basic Concept of Price You Need to Master

When participating in margin contract trading, you will encounter three different types of prices. Distinguishing them is an important factor for effective risk management.

Current Trading Price is the real-time updated price on the order book. This is the price at which orders are matched at each trading moment.

Index Price is built from a more comprehensive mechanism. Instead of relying on a single exchange, it is calculated by taking the most recent trading prices from three or more sufficiently liquid trading points, then applying weights to obtain a standard price.

What is Mark Price - this is a particularly important concept. It is calculated based on a combination of the spot index price and the base moving average. This price is used to determine unrealized profit and loss of the account and is the criterion for system-mandated liquidation.

How to Determine the Spot Index Price

Basic Calculation Method

To ensure the index price accurately reflects the reasonable spot price of each token, the system does not rely on just one data source. Instead, it uses a weighted average price from at least three sufficiently liquid trading sources. This helps keep the index price stable even when the market becomes extremely volatile on a specific exchange.

The process includes the following steps:

1. Retrieve price and trading volume from selected exchanges in real-time
2. Exchanges undergoing maintenance or not providing the latest data will be excluded from the calculation
3. For pairs priced in BTC, the price will be converted to USDT using the BTC/USDT index
4. Apply weights to each source to obtain the final index price

Market Protection Mechanism During Instability

To avoid difficulties when exchanges encounter issues or lose connection, the system applies protective measures:

• When data from three or more exchanges is available: they are assigned equal weights. If any exchange’s price differs by more than 3% from the overall average, the system will adjust it down to 97% or up to 103% of the average price, depending on the direction of the discrepancy
• When data is available from only two exchanges: both are assigned equal weights
• When only one exchange has valid data: the most recent trading price from that exchange will be used directly

What is Mark Price: How It Works and Applications

Mark Price Calculation Formula

What is the mark price in practical terms? It is a fusion of two components:

Mark Price = Spot Index Price + Base Moving Average

Where:

• Base Moving Average = Moving average of (Price between the contract - Spot index price)
• Contract Mid-Price = (Best Bid Price + Best Ask Price) / 2

This moving average mechanism plays an important role: it significantly reduces short-term volatility and limits unnecessary forced liquidations caused by abnormal fluctuations or sudden price jumps.

Application of Mark Price in Profit and Loss Calculation

Mark price is used to calculate unrealized profit and loss for both types of margin contracts.

For Cryptocurrency Margin Contracts:

• Long Position PNL = Face Value × |Number of Contracts| × Multiplier × (1 / Average Fill Price - 1 / Average Mark Price)
• Short Position PNL = Face Value × |Number of Contracts| × Multiplier × (1 / Average Mark Price - 1 / Average Fill Price)

For USDT Margin Contracts:

• Long Position PNL = Face Value × |Number of Contracts| × Multiplier × (Mark Price - Average Fill Price)
• Short Position PNL = Face Value × |Number of Contracts| × Multiplier × (Average Fill Price - Mark Price)

Forced Liquidation: Which Criteria Are Applied?

The key point to remember: What is the mark price to decide on liquidation? It is the standard used. When your account reaches the risk threshold, the system will rely on the mark price to perform forced liquidation, not the most recent trading price. This approach protects traders from liquidations caused by temporary price fluctuations.

Thus, both unrealized profit and loss and the liquidation process use the mark price as the criterion, not the current trading price or the index price alone.