Liquidation - Fair Price Marking

Overview

The trading system at BaseFEX avoids unnecessary liquidations through the help of the Fair Price Marking mechanism. Without this system, unnecessary liquidations may occur if the market is being manipulated or is illiquid. The system can achieve this by setting the Mark Price of the contract to the Fair Price instead of the Last Price.

For Perpetual Contracts, the Fair Price equals to the underlying Index Price plus a decaying Funding Basis rate, and the Index Price is an average of the latest prices on the major spot exchanges.

All Auto-Deleveraging contracts are subject to Fair Price Marking, and this mechanism only affects the Liquidation Price and Unrealized PNL, so it does not affect Realized PNL.

Note: Your Unrealized PNL might be positive or negative immediately after your order is executed. This happens when the Fair Price is slightly different from the Last Price. This is normal and does not mean you have lost money, but be sure to keep an eye on your Liquidation Price to avoid a premature liquidation.

Calculation of Fair Price for Perpetual Contracts

The Fair Price of Perpetual Contract is calculated by the Funding Basis rate:

Funding Basis = Funding Rate * (Time Until Funding / Funding Interval)
Fair Price = Index Price * (1 + Funding Basis)

You can check funding page for more detailed information on the funding and examples.

Calculation of Fair Price for Futures Contracts

The Fair Price Marking for Futures Contracts is slightly different from the Perpetual Contract. It is done by comparing the Impact Mid Price of a contract to its underlying Index Price. This is used to calculate the % Fair Basis, which is then used in the derivation of the Fair Price.

Impact Bid, Ask and Mid Price

Impact Mid Price = Average (Impact Bid Price, Impact Ask Price) where;
Impact Bid Price = The average fill price to execute the Impact Margin Notional on the Bid side
Impact Ask Price = The average fill price to execute the Impact Margin Notional on the Ask side

The Impact Margin Notional is the notional available to trade with 0.1 BTC worth of margin (i.e., 0.1 BTC / Initial Margin) and is used to determine how deep in the order book to measure either the Impact Bid or Ask Price.

For example:

Fair Price Derivation

Once BaseFEX has calculated the Impact Mid Price, it can use this number to calculate the % Fair Basis. The % Fair Basis will be used to calculate the Fair Value of the futures contract, which is added to the Index Price to finally create the Fair Price, which is used for marking purposes.

% Fair Price Basis = (Impact Mid Price / Index Price - 1) / (Time To Expiry / 365)
Fair Value = Index Price * % Fair Basis * (Time to Expiry / 365)
Fair Price = Index Price + Fair Value

For example:

Impact Mid Price = $105
Underlying Index = $100
Time to Expiry = 30 Days

% Fair Price Basis = ($105 / $100 - 1) / (30 / 365) = 60.8%
Fair Value = $100 * 60.8% * (30 / 365) = $5
Fair Price = $100 + $5 = $105

Note on Calculation: The % Fair Basis is updated each minute, but only if the difference between the Impact Ask Price and Impact Bid Price is less than the maintenance margin of the futures contract. After it has been updated, the Fair Price will be equal to the Impact Mid Price, and then the Fair Price will float with regard to the Index Price and the time-to-expiry decay on the contract until the next update.