On many other platforms the Mark Price is based on an (Exchange) Index, which is a basket of spot contracts across a multiple of exchanges. On EQUOS the perpetual futures Mark Price is based on the EQUOS Perpetual product itself as we believe this to be more prudent. However, our Mark Price will be bound by a spread to the Exchange Index to prevent market manipulation. The spread bound to the Exchange Set is initially set at 0.2% but as the liquidity on our platform grows we plan to relax this bound. Over time perpetual futures on EQUOS thus becomes less reliant on the Exchange Index and more a product of EQUOS’ own order book. The TWAP is based on the open, high, low, and close price of 1-second bars.
The below examples show the relation between Market Price and the Mark Price. We illustrate the effect of bounding the Mark Price to the Exchange Index by assuming the last executed trade was a particularly large order and therefore got filled significantly lower than previous orders.
Assume we have had the following traded prices for EQUOS BTC Perpetual over the past 3 seconds, and the very last trade was a particularly large order that therefore got filled at a price significantly below the rest of the orders and the market.
After trade 13 got executed, the Market Price of the EQUOS BTC Perpetual future was 9,997 USDC. The particularly large order, trade 14, got filled at 9,953 and therefore pushes the Market Price down by 0.44% to 9,953 USDC.
To calculate the Mark Price, we need to calculate the TWAP. The TWAP is the average of the Open, High, Low, and Close for each 1-second period:
Thus, the 3-second TWAP of the Market Price in this case is 9,994.25 USDC. Let’s further assume the Exchange Index is at 10,000 USDC. The bounds to our Mark Price then are 10,000 x (1 - 0.2%) = 9,980 USDC and 10,000 x (1 + 0.2%) = 10,020 USDC. As 9,994.25 is within the bound, we say the Mark Price = 9,994.25 USDC. Note that the Market Price is 0.41% below the Mark Price. If we would have marked the contract at the Market Price, this could have caused liquidations of positions from highly leveraged traders.
Assume the same traded prices as in the previous examples such that our Market Price is still 9,953 USDC and the 3-second TWAP of the Market Price is still 9,994.25 USDC. Now assume that the Exchange Index is trading at 10,020 USDC. The bounds to the Mark Price now are 10,020 * (1 - 0.2%) = 9,999.96 USDC and 10,020 * (1 + 0.2%) = 10,040.04. In this case the 3 second TWAP of the Market Price is outside of the bounds to the Exchange Index. The Mark Price is set to the nearest bound, such that Mark Price = 9,999.96 USDC.
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As we explained in the previous sections in this guide, an account is only able to send new orders as long as its Total Account Margin is higher than the Initial Margin required for all open positions and open orders. As soon as the Total Account Margin drops below the Initial Margin, the account can no longer send any new orders unless such order would reduce the existing position (e.g. a sell order, when the current position is long). To continue adding positions (e.g. add buy orders, when the current position is long), the trader will have to transfer additional funds that can be used for margin to their wallet, close open orders, or close open positions.
As we mentioned previously, perpetuals have a mechanism to ensure pricing aligns with the underlying spot product. We refer to the spread between the Spot and the Perpetual contract as Basis. The resulting exchange of payment between long and short holders of the contract is called the Basis Payment.
Many virtual currency exchanges advertise the ability to trade products with leverage. In traditional finance, there are a number of popular leveraged products, such as ETFs. An ETF is a product that moves as a function of the underlying factor and the leverage factor. For example, an ETF that has 5x leverage will lose or gain 5% if the underlying asset moves by 1%. Leverage defines your position’s exposure to the underlying asset class.
What are derivatives? Derivatives have been around for millennia; their use can be traced back to ancient times when people bartered with one another to trade perishable goods such as grain and livestock. They gained widespread popularity during the rise of the financial services sector, when newer valuation techniques were created in the 1970s and rapidly developed the derivatives market. It is difficult to imagine modern finance without derivatives now.