Last price vs. Mark price: Understanding crypto futures

Crypto futures use different price reference mechanisms that play a huge role in how these instruments function. Here’s what you need to know:

1. There are three types of reference prices to be aware of: the Last Price, the Index Price and the Mark Price.

2. Some trading platforms allow traders to select a reference price to act as the trigger signal for their TP/SL orders. 

3. The purpose of such a mechanism is to offer some protection from large price discrepancies between platforms and allow traders to trade on one platform with confidence. 

4. Reference prices - specifically the Mark Price - determine the value of a position and trigger liquidations. Therefore, traders need to understand them in order to effectively manage risk.

If you are unfamiliar with futures contracts, you should refrain from using them until you have a comprehensive understanding of how they work. One honest mistake while trading with leverage can result in losing all your capital.

While this article will help inform you about some of the key components, you can learn more about crypto derivatives and how to trade them at Kraken here.

As mentioned above, there are three reference prices that play a pivotal role in how futures contracts are executed: 

• The Last Price is the last price of the instrument you are trading on the platform in question. 

• The Index Price reflects the average price of the instrument you are trading, derived from a basket of spot markets. Index prices source data from various exchanges, each assigned with their own weighting. 

• The Mark Price represents an estimate of an asset's fair value at any given time. It is theoretical in nature, and is calculated differently between platforms. Crucially, it is used to determine margin requirements, liquidations and to value any open positions.

Each reference price performs a different function within futures contracts, but for traders, monitoring these prices - and how they can differ between platforms - play a crucial role in managing risk. 

For example, if you are trading a volatile asset, with low liquidity that varies wildly in price between platforms, how you use reference prices to determine your entries and exits will be critically important. 

Most platforms allow traders to select which price reference they want to use for their take-profit and stop-loss orders. As using either the Last Price or Mark Price come with their own pros and cons, it’s important that traders know the difference between the two and when to use them. 

While the differences between them may appear minor, they can have a dramatic impact on the outcome of a trade.

The Last Price or Last Traded Price is dictated by the last trade that took place on the platform you are trading on.

While it reflects the most recent price, the price of the same asset can differ between platforms. Because a large trader could theoretically manipulate the price of a contract on one platform, the Last Price is not used to trigger liquidations. Instead, that is dictated by the Mark Price (see below). 

The last price is used to determine realized profit and loss. 

Example: You are trading BTC derivatives using the Kraken crypto exchange, and the last price traded was $100.000. Therefore, the Last Price is $100.000. This is a reflection of the trading activity on this specific futures instrument at Kraken.

If you were trading crypto futures on another platform, the Last Price would reflect the last trade on that platform. 

Many crypto traders opt to use the Last Price reference as the trigger mechanism for their orders. This makes sense, as you can determine your orders and analysis based on the price chart provided by the platform you are trading on.

Additionally, it enables traders to know that when price reaches their entry, their order will be filled, irrespective of any price discrepancies that may exist between platforms at that time.

The Mark Price estimates the fair and objective value of a futures contract by combining data from a few sources.

The nature in which it is calculated varies from platform to platform, though often includes the Index Price and the Basis - the difference between the spot and futures prices. 

Therefore, the Mark Price isn’t a traded price. It’s purely theoretical. Unrealized gains in futures contracts are calculated by the difference between the Mark Price and the entry price. 

Example: Let’s imagine you are trading BTC derivatives again at Kraken, and Bitcoin price is moving down rapidly. As price descends, you notice that the Last Price on Kraken deviates from the Mark Price by a few dollars for a brief period. This small and temporary divergence is a result of the sharp move down on Bitcoin, and the interaction of many variables between platforms.

The price on Kraken dipped slightly lower than the theoretical Mark Price, and whether this would impact on your position depends on which reference price you selected as your triggering mechanism. 

The methodology used to calculate the Mark Price makes it less susceptible to sudden volatility triggered by large individual traders or momentary market fluctuations.

As the Mark Price is used to trigger liquidations, this offers some protection from manipulation, as it is derived from multiple sources. 

Which price reference you use to trigger your orders is an important decision that may require some careful consideration and discretion.

On most, large centralized trading platforms, with deep liquidity, deviations between the reference prices may be minor and short-lived. But there can be certain situations where it might be important to scrutinize which reference price is more suitable. 

The benefit of using the Last Price is that your execution price will be closer to your expected transaction price, depending on liquidity.

For example, if you set a TP order on Solana (SOL) using the Last Price at $100, when price reaches $100 on your chosen trading platform, the order is executed at or around $100. Using the Mark Price could mean that your average execution price is slightly different - higher or lower - as it may not exactly match the Last Price.

However, using the Mark Price for execution may be advantageous when trading on a platform with inferior liquidity.

Here, the Mark Price can actually protect you from anomalous moves in a thinly-traded market, as the Last Price has no impact on execution and the Mark Price should remain in line with the more reliable Index Price. 

The disadvantage of using the Last Price is that since liquidation is triggered by the Mark Price, it’s possible that you could be liquidated from your position before your stop-loss is triggered.

If the Mark Price were to reach your liquidation prior to reaching your preset stop-loss - for any reason - your position will be liquidated.

This phenomenon is much more likely to occur when your stop-loss (dictated by the Last Price) is set close to your liquidation price, as only a relatively minor deviation could trigger the trade to be liquidated. 

In summary, your decision to use either the Last Price or Mark Price should depend on a few factors:

• The liquidity of the contract you are trading.

• The frequency of large and unexpected moves in your chosen contact.

• The propensity for the Last Price and Mark Price to deviate.

• The calculation methodology of the Mark Price.

• The stability and reliability of the Mark Price relative to the Last Price.

Understanding how the Last Price, Index Price and Mark Price impact on crypto futures contracts is critically important.

Traders should carefully examine the behavior and liquidity of the contacts they are trading in order to determine which reference price should be used as a trigger signal.

Having a deep understanding of how these pricing mechanisms operate may help traders preserve capital and prevent unnecessary liquidations.

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