Liquidation - Fair Price Marking
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, is illiquid, or the Mark Price swings unnecessarily relative to its Index Price. The system is able to achieve this by setting the Mark Price of the contract to the
Fair Price instead of the
For Perpetual Contracts, the Fair Price equals to the underlying Index Price plus a decaying Funding basis rate.
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, and is done by comparing the Impact Mid Price of a contract to its underlying Index Price. This is used to then 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
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.
|Contract||Initial Margin||Impact Margin Notional|
|BTC Quarterly||1%||0.1 BTC / 0.01 = 10 BTC|
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 making 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
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.