Mark Price and Index Price

Three Types of Prices

In perpetual futures trading, three different prices exist. Each has a different role, so it's important not to confuse them.

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Index Price

Composition

Index price is a weighted average of prices from multiple major spot exchanges. This prevents price distortions from any single exchange from affecting the index.

Binance's BTC index references prices from:

• Binance Spot
• Coinbase
• Bitstamp
• Kraken
• Other major exchanges

Each exchange has a weight assigned, and protective logic automatically excludes exchanges showing abnormal prices.

Outlier Removal

If an individual exchange's price deviates more than a certain percentage from others, it's excluded from the index calculation. This prevents flash crashes or outages on one exchange from affecting the entire index.

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Mark Price

Calculation Method

Mark price is calculated by applying funding rate factors to the index price.

Mark Price = Index Price x (1 + Funding Basis)

Funding basis reflects cumulative funding within the current funding period. This ensures the mark price represents the "fair value" of perpetual futures.

Why Mark Price Instead of Last Price

Using last price for liquidation reference creates these problems:

Unfair liquidations from price manipulation:

1. Large player intentionally mass sells
2. Last price drops momentarily
3. Many long positions unfairly liquidated
4. Large player buys back at lower prices for profit

Mark price is based on spot prices from multiple exchanges, so it's not affected by temporary price movements on a single exchange. This prevents unfair liquidations.

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Mark Price and Liquidation

Liquidation Reference

On all major exchanges, liquidation is determined based on mark price.

• Even if last price crosses liquidation price, if mark price hasn't reached it, no liquidation occurs
• Conversely, if last price looks fine but mark price reaches liquidation price, liquidation happens

Practical Implications

Thanks to this mechanism:

• Unfair liquidations from momentary price movements (wicks) on a single exchange are reduced
• However, if the entire market moves simultaneously, mark price follows, and liquidations will occur

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Unrealized PnL and Mark Price

Two PnL Displays

Exchanges typically display unrealized PnL based on two references.

Mark Price-based PnL:

• Calculated using mark price
• The substantive PnL used for liquidation determination
• Reflects consensus price across multiple exchanges

Last Price-based PnL:

• Based on that exchange's last trade price
• Closer to the actual amount received when closing position

If there's a large difference between the two PnLs, that exchange's price has deviated from market average.

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Premium and Discount

Perpetual Futures Premium

When perpetual futures price is higher than index price, it's in Premium; when lower, it's in Discount.

Using Premium/Discount

Premium and discount are closely related to funding rate. Large premiums lead to higher funding at next settlement; large discounts lead to negative funding.

Sharp premium changes indicate rapid shifts in market sentiment.

• Premium surge: Long demand explosion. Possible overheating
• Discount surge: Short demand explosion or panic. Fear maximized

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Mark Price Differences Between Exchanges

Why They Differ

Each exchange has different index compositions and slightly different mark price formulas. So Binance and Bybit mark prices can differ at the same moment.

Practical Impact

• The same position can have different liquidation timing depending on exchange
• Exchanges with fewer constituents in their index may have less stable mark prices
• Major exchanges (Binance, Bybit, OKX) reference sufficient spot exchanges and are generally stable

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Index Price Failure Cases

Exchange Outage Ripple Effects

If a major spot exchange included in the index experiences an outage, index price can become distorted.

Historical cases:

• A specific exchange's BTC price displayed near 0 due to outage
• This was reflected in the index, causing mark price to crash
• Normal positions were unfairly liquidated

Most exchanges now apply outlier removal algorithms to prevent such incidents, but it's not perfect.

During Liquidity Crises

In extreme market conditions (like March 12, 2020), spot exchange liquidity itself can dry up, making index prices unstable. In such situations, mark price's protective function weakens.

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What Traders Need to Know

Check Mark Price Habitually

Before opening positions, check the difference between mark price and last price. Large differences mean that exchange's price has diverged from market, and you may enter at unfavorable prices.

Liquidation Price Reference

Remember your liquidation price is based on mark price. If the chart shows last price hit your liquidation level but you weren't liquidated, mark price hadn't reached it yet. If you were liquidated but the chart looked fine, mark price got there first.

Exchange Selection

Mark price stability is an important criterion for choosing exchanges. Use exchanges with transparent index composition, sufficient spot exchange references, and well-developed outlier removal logic.

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Summary

Mark price is a fair price calculated based on multiple spot exchange prices, serving as the reference for liquidation determination and unrealized PnL calculation. Using mark price instead of last price prevents unfair liquidations from price manipulation on single exchanges. Perpetual futures premium/discount directly relates to funding rates and signals rapid shifts in market sentiment.

Next article: Basis, Contango, and Backwardation - The Gap Between Spot and Futures