Understanding the mark price and index price of a crypto asset can be influential to a trader's success. Knowing each forms part of your risk management approach, provides greater transparency to asset values, and can support more informed and effective trading in general. As such, whether you're a crypto native or a beginner crypto trader, the ability to calculate the index and mark price is an important skill — particularly when it comes to more complex forms of trading, such as futures.
Interested in learning more about these important facets of crypto futures trading? In this article, we'll answer what index price and mark price are, how they relate to each other, and how they're calculated.
TL;DR
The index price and mark price are different representations of the price of an asset. The index price is used as part of the calculation for the mark price.
The mark price is calculated using the spot index price and the moving average of the basis.
The mark price is used to calculate unrealized profit and loss and to set liquidation triggers. Exchanges use index prices from other exchanges to set their own prices.
Understanding the mark price and index price is especially important in futures trading because of its greater complexity when compared to spot trading.
What are index price and mark price, and how are they connected?
The index price and mark price are both representations of an asset's value. The fact that these prices can differ may at first seem problematic. However, the two prices each serve their own purpose, and bring distinct benefits to traders and exchanges.
The index price is calculated by selecting the last traded prices from three or more other exchange venues with adequate market liquidity as the weighted index constituents. The last traded price is the real-time traded price shown in the order book during trading.
Meanwhile, the mark price is calculated based on the spot index price and the moving average of basis — the difference between the last traded price/spot price and contract strike price. The mark price is used for the calculation of account earnings and loss and for settlement purposes. It's important to note that forced liquidations take place based on the mark price instead of the last traded price.
How are they connected? The index price is considered a composite price because it's derived from prices across multiple exchanges. And as mentioned above, the mark price is based on the index price. This is done to make sure the liquidation of positions is fair and not driven by short-term market volatility. Lets now look more closely at the index and market prices and how they're calculated.
Index price
What is a spot index price?
OKX's USDT-margined futures are denominated in the USDT index price, while crypto-margined futures are denominated in the underlying cryptocurrency's USD index price.
To make sure the index prices accurately reflect each token's fair spot price, they're calculated as weighted averages of prices taken from at least three exchange venues with adequate market liquidity. Additional measures are also factored in for exceptional circumstances.
This methodology is followed to make sure the index price fluctuates within a normal range, even if the price becomes extremely volatile on a single exchange.
Spot index price methodology in brief
For each index price, we retrieve the corresponding trading pair's price and volume from the designated exchanges in real time.
Exchanges that underwent system maintenance or didn't update their latest price and volume during a specified time period won't be used in calculations for the latest price updates. The update frequency is different for each index.
For trading pairs quoted in BTC, the prices will be converted to USDT by multiplying the OKX BTC/USDT index.
If there's no valid data from every exchange, then data taken from each exchange will be weighted as explained in the additional protections section below.
For details, please visit OKX price index.
Additional protections
OKX provides additional protections to avoid poor market performance during outages for spot exchanges, or during connectivity problems:
When data from three or more exchanges are available, they'll be weighted by their pre-set weighted values. If an exchange’s price deviates more than 2% from the median price of all exchanges, that exchange’s price will be taken at 98% or 102% of the median, depending on whether it’s too high or too low.
When data from two exchanges are available, they’ll be weighted equally.
When data from only one exchange is available, it’ll be taken as the spot index price.
Mark price
How to calculate the mark price of expiry futures and perpetual futures
The mark price takes into account both the spot index price and the moving average of the basis. The moving average mechanism reduces the fluctuations in the short-term contract price and reduces unnecessarily forced liquidation caused by abnormal volatility.
The calculations are:
Mark price = spot index price + basis moving average
Basis moving average = moving average (mid price of contract - spot index price)
Mid price of the contract = (best ask price + best bid price) / 2
Mark price: use cases
Mark price is used to calculate unrealized profit and loss on both crypto-margined and USDT-margined futures:
Crypto-margined futures
PnL of long position = face value * |contracts number| * multiplier * (1 / avg. open price - 1 / avg. mark price)
PnL of short position = face value * |contracts number| * multiplier * (1 / avg. mark price - 1 / avg. open price)
USDT-margined futures
PnL of long position = face value * |contracts number| * multiplier * (avg. mark price - avg. open price)
PnL of short position = face value * |contracts number| * multiplier * (avg. open price - avg. mark price)
Why are mark price and index price important to futures trading?
Although traders of all instruments would be wise to understand mark price and index price, it's especially valuable for those who regularly trade futures contracts. This instrument is considered more complex, making the accurate valuation of assets particularly important. Here's why.
Accurate stop-loss and take profit levels: Calculating the mark and index prices can help you to more accurately set stop-loss and take profit levels based on expected liquidation triggers. The index price is influential here, because it makes sure your positions will only be closed once the market truly moves against you, rather than as a result of short-term volatility.
Fair margin calls: Many futures traders choose to apply leverage to potentially amplify the gains from their positions. When leverage is used, you may face a margin call, which is a prompt from your exchange to deposit more funds to maintain your position. The mark price is typically used as the base for the margin call rather than the market price, because the mark price is generally less volatile and shielded from erratic price movement experienced by a single exchange.
Reduced risk of price manipulation: Because the index price combines prices from multiple exchanges, you have some protection against price manipulation on a single exchange, which could lead to unnecessary forced liquidation.
The final word
For any crypto trader, it's fundamental to understand what the index price and mark price are, how they're connected, and how they can impact the trades you make. Many would agree that this is especially important for those who trade futures contracts with margin applied, given the added complexity of this trading instrument. Put simply, the index price and mark price can help to provide a more accurate representation of an asset's true price. Not only can this give some additional protection against forced liquidation, it can also support more accurate forecasting for those who trade futures contracts.
Interested in learning more about futures trading? Read our guide on crypto-pre-market futures, and perpetual futures contracts.
FAQs
Mark price is the weighted average of an asset's spot price taken from multiple exchanges. Meanwhile, market price is the current price an asset is being bought and sold at on an exchange.
The liquidation price is the price at which your position will be closed as an asset's value fluctuates. The mark price is the weighted average of an asset's spot price drawn from prices across multiple exchanges. When the mark price reaches the liquidation price, your position will be liquidated.
The mark price is used in futures trading to calculate the unrealized profit and loss on margined futures trades. It's also used as the benchmark to liquidate positions as prices fluctuate.
The index price forms part of the calculation for the mark price. The index price represents the average price of an asset across multiple exchanges. As a result, the index price is often judged to provide a more accurate representation of prices because it takes into account the price differences across exchanges.
