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Perpetuals Trading Series: What is Basis and why is it important?

Thursday, January 21, 2021

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.

Basis

At EQUOS, the Basis is calculated and settled in USDC every 8 hours at 04:00, 12:00, and 20:00 UTC. In order to calculate the Basis of the perpetual future, we compare the difference between the Market Price of the EQUOS Spot contract and the Market Price of the EQUOS Perpetual contract over the past 8 hours: Basis = 8 hour TWAP of (Spot Market Price - Perpetual Market Price) The TWAP is based on the average of the open, high, low and close of each 1 minute bar. The Basis is capped/floored at +/- 0.375% * Perpetual Mark Price at the Basis calculation time to avoid instantaneous liquidation for positions with high leverage. Note that the Market Price may be different from the Mark Price used to value futures contracts during trading hours, which is bound by the Exchange Index to protect market participants against manipulative trading. 


Basis Payment

The Basis Payment is an exchange of payment between long and short holders of the perpetual contract, based on the calculated Basis: Basis Payment = Position Size * Basis The Basis and Basis Payment are defined from a long holders perspective such that when Spot Market Price < Perpetual Market Price, every long holder of the contract pays the short holders of the contract a value equal to their Position Size x Basis. The Basis Payment is only paid or received if a position in the contract is held at the time of Basis calculation. 


Example 1 

When the perpetual future trades above the spot Trader A, let’s call him Matt, has bought 2 EQUOS BTC Perpetuals and is thus long. We say Matt’s position size is +2. Trader B, let’s call her Julie, has sold 2 EQUOS BTC Perpetuals and is thus short. We say Julie’s position size is -2. Let’s assume that over the past 8 hours, the EQUOS BTC Perpetual Market Price was continuously 20 USDC higher than the EQUOS BTC Spot Market Price. The Basis is -20 USDC. Furthermore, assume that at the time of the basis calculation the EQUOS Spot Market Price is 10,000 USDC, the EQUOS Perpetual Market Price is 10,020 USDC, and the EQUOS Perpetual Mark Price is 10,015 USDC. 

The Basis is negative and does not exceed the floor, therefore Matt pays 2 * -20 USDC = -40 USDC, whereas Julie receives -2 * -20 = 40 USDC 

Example 2 

When the perpetual future trades below the spot Assuming Matt and Julie’s positions from the first example, such that Matt’s position size is +2 and Julie’s position size is -2. Assume that over the past 8 hours, the EQUOS Perpetual Market Price was continuously 50 USDC lower than the EQUOS Spot Market Prices. The Basis is +50 USDC. Furthermore, assume that at the time of the basis calculation the EQUOS Spot Market Price is 10,000 USDC, the EQUOS Perpetual Market Price is 9,950 USDC, and the EQUOS Perpetual Mark Price is 9,955 USDC. 

The Basis is positive and exceeds the cap. In this case Trader A receives 2 * 37.33 USDC = 74.66 USDC, whereas Trader B pays -2 * 37.33 USDC = -74.66 USDC. 


Download the full perpetuals guide from the EQUOS Archives homepage. 

Trade perpetuals here: EQUOS.io.

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