Index and Mark Price

Overview of the difference between Index and Mark Price.

Index Price

Index Price is calculated from the volume-weighted average of index prices from multiple centralized exchanges. This price offers a more holistic, averaged, and arguably more accurate representation of an asset's value in the market by aggregating price data from various leading exchanges. It is used as a reference to determine funding rates, liquidations, and others.

1. Multiple Exchange References: The Index Price, particularly for futures contracts, often refers to spot prices from major exchanges. This is to incorporate a broader market sentiment and avoid localized price manipulations.

2. Weighted Average Formula: The Index Price isn't a simple average but rather a weighted one. This means each exchange's price influences the index proportionally to its trading volume.

3. Standardized Calculation: Exact calculation methodologies are provided for sophisticated traders to manage positions accurately.

Benefits of Using Index Price:

1. Minimizing Manipulation: Referencing multiple exchanges makes the Index Price less susceptible to localized price manipulations. A single exchange might face price manipulation risks, but it's highly unlikely for multiple exchanges to experience this simultaneously.

2. Reflecting the Market's Actual Sentiment: Index Prices, particularly those calculated from several major exchanges, portray a more accurate picture of the crypto futures market.

3. Consistency in Settlement: Using the Index Price ensures that derivatives contracts, be they futures, perpetuals, or others, are settled at a price that truly reflects the market's stance.

4. Optimal Order Execution: Especially during high-volatility periods, using the Index Price ensures orders are executed based on the prevalent market price and not restricted to the dynamics of a single exchange.

Mark Price

Mark Price indicates the price at which you can instantly buy or sell an asset. It represents the best rate for traders based on existing offers on an order book. This is the price that is present on Aark Digital and, therefore, at which trades are executed. Mark Price provides an estimate of the perpetual contract's "fair" price, and it plays a crucial role in futures and derivatives trading.

Mark Price follows the formula below.

$$Mark\ Price = Index\ Price \ +\ Premium\\Premium = Index\ Price \ *\ (long\ OI - short\ OI)\ / \ depth\ factor /\ 100$$

If the market is long skewed (long OI > short OI): then Mark Price > Index Price. If the market is short skewed (long OI < short OI): then Mark Price < Index Price.

How It Works:

Because traders trade against the pool at Aark Digital, such ask and bid prices are executed by the pool. Traders are insured that ample liquidity is always present at the mark price.

• For buy orders, the Mark Price refers to the lowest current ask price. It's the cheapest price someone is currently willing to sell the asset for.

• For sell orders, the Mark Price corresponds to the highest current bid price. It denotes the highest price someone is willing to pay for the asset.

How Mark Price Functions in Trading:

While the Mark Price influences the unrealized Profit and Loss (PnL) and the forced liquidation price, it does not affect the realized PnL. With the Mark Price's accurate representation of an asset's value, traders can prevent unnecessary liquidations—events that could occur due to market manipulations or low liquidity scenarios if the last traded price was solely used.

While the Mark Price influences the unrealized Profit and Loss (PnL) and the forced liquidation price, it does not affect the realized PnL. With the Mark Price's accurate representation of an asset's value, traders can prevent unnecessary liquidations—events that could occur due to market manipulations or low liquidity scenarios if the last traded price was solely used.

• Liquidations: The Mark Price acts as the trigger for liquidations. When it matches a position's liquidation price, the position is liquidated.

• Leverage and PnL Calculations: It's essential to monitor the Mark Price when trading with leverage as it dictates the unrealized profit or loss.

• Protection from Market Manipulations: Since the Mark Price references spot prices and premiums across multiple exchanges, it offers a more holistic view of an asset's value, safeguarding traders from potential price manipulations.