The mark price on Deribit serves several essential functions:
Equity Calculation:The mark price provides an estimate of a portfolio's value. If a user closes all positions at the mark price without incurring fees, their account balance will approximate this value.
Preventing Liquidations:By estimating users' equity through the mark price, the exchange can determine when liquidations should occur and help prevent unnecessary liquidations. The mark price, derived from market bids and asks, includes noise that is mitigated using an Exponential Moving Average (EMA). This protects traders from sudden market fluctuations that could otherwise trigger liquidation events. However, during genuine market movements, the mark price tends to lag.
Flash Crash Protection:In the event of a sudden change in futures bid/ask prices without corresponding index movement, it typically takes about 60 seconds for futures prices to adjust from the current price to the target price. This delay means a flash crash would need to persist for a relatively long period before significantly impacting futures prices. For options, this adjustment period extends to approximately 1000 seconds.
Margin Calculations:Margin requirements are calculated based on the mark price.
Reducing Market Manipulation:The mark price algorithm searches for a certain volume on both the bid and ask sides, weighting these prices accordingly. This process makes the mark price more resistant to manipulation.
Caution
Due to the factors mentioned, particularly the lag in genuine market moves and flash crash protection, the mark price should not be relied upon for making trading decisions. For example, in futures trading, sudden price movements often result in the mark price falling outside the bid-ask spread.