What is the Mark Price—An essential mechanism to prevent market manipulation in futures trading

In cryptocurrency futures trading, the prices on the spot market and the futures exchange can sometimes diverge. When market manipulation exploits this divergence, many traders may face forced liquidations they did not intend. To protect investors from such risks, the industry has adopted a system called the “mark price.” The mark price is an indicator calculated based on real-time spot prices from multiple major exchanges and functions as a trigger for forced liquidation in futures trading.

Why is the Mark Price Necessary?

Cryptocurrency markets are highly volatile, and sometimes the futures market price can significantly diverge from the spot market price. If forced liquidation decisions are based solely on the futures market price, deliberate price manipulation could lead to mass liquidations of positions.

For example, an intentional trader could temporarily spike the futures market price, creating a level far removed from the spot market price. As a result, traders with unrealized losses could have their positions forcibly liquidated one after another, losing a substantial portion of their initial investment. Such market manipulation damages not only individual traders but also erodes trust in the entire cryptocurrency industry.

Implementing the mark price significantly reduces this risk.

How is the Mark Price Calculated?

The mark price reflects the prices across multiple exchanges. The specific calculation method, widely adopted in the industry, typically involves:

• Starting with a global average spot price (index price) from multiple exchanges.
• Applying an adjustment factor that reflects current market conditions.
• Using the moving average of the basis (the difference between the mid-price of bid and ask and the index price), which captures supply and demand dynamics between the futures and spot markets.

The general formula involves:

• The index price multiplied by the current funding rate and the time until funding.
• The moving average of the basis (the deviation between the mid-price and the index price).
• The most recent actual trade price.

Taking the median of these three values results in a robust price indicator less susceptible to market manipulation.

Dual Price Mechanism with the Final Trade Price

In addition to the mark price, the concept of the “final trade price” is also important. The final trade price is the actual current market price on the exchange, which is always pulled toward the spot market price through the funding mechanism.

By combining these two price indicators, exchanges prevent the market price from diverging significantly from the spot market. The mark price serves as the basis for forced liquidation decisions, while the final trade price reflects actual executed trades. This dual system helps prevent market manipulation from both directions.

Responding to Market Fluctuations

During highly volatile periods, data needed for calculation may be insufficient, or anomalies may occur in the spot market prices. In such cases, the criteria for selecting the mark price can be flexibly adjusted, such as basing calculations on the exchange’s last trade price.

This adaptive approach to calculating the mark price helps minimize the risk of unwarranted liquidations during unpredictable market conditions.

Summary

The mark price is not just a reference price but a crucial mechanism to ensure fairness in futures trading. It combines multiple price indicators to protect investors from market manipulation and maintain trust in the entire cryptocurrency market. When engaging in futures trading, understanding which price is used as the basis for forced liquidation and why this system is necessary is an essential first step in effective risk management.