For stops a trader needs a trigger price. Today Deribit introduces the trigger last-price. On Deribit the mark-price, index-price and last-price can be used as trigger prices. All have their specific usage and a trader can use them specifically for the according scenario. With the introduction of the trigger last-price, this trigger will be set as default. A trader needs to make sure the right trigger is selected when setting up a stop.
The trigger Last-price
The trigger last-price is a direct connection to market movements on our exchange. Just like the name says it triggers on the last traded price. Stop-limits can have the limit orders tight but when a market is moving they do not guarantee to be filled. With a stop market the order guarantees a fill however the price is not guaranteed.The trigger last-price makes sure it will be triggered by the trading events in our orderbook. The danger of the trigger last-price is that wicks caused by fat-fingers, stop-hunts or other deep executions will cause the stop to be triggered, without having the security the overall price of the asset stays on that level.
The trigger Mark-price
As the mark price is calculated with a dampener it follows the orderbook and is not at risk for wicks created by fat finger orders, deep executing stops and other orders. The mark price is calculated as (Mark Price = Deribit Index + 30 seconds EMA (Fair Price — Deribit Index)). It is the mark price that is used for the PNL calculations as well as being used to check any open position for the risk of a possible liquidation. Using this trigger to place a stop to exit before a liquidation can be executed is a safe approach if not placed too tight. However in rapid market movements the mark price will be behind the last traded price due to the dampener so a trader needs to keep in mind that the actual traded price can have a distance from the mark price when their stop is triggered.
The trigger Index-price
The index price is the average of several exchanges. As futures trade on a premium or discount this trigger price needs to be handled a bit different. By using the index as a trigger on futures, this premium or discount can be taken into account automatically. Using the index-price as a trigger for a stop to exit will always trigger relatively late and it is not recommended to use this to exit an position. Please take note that if you use the trigger Index-price while trading a future with a premium or discount the indexprice is not equal to the marketprice, keep this in mind when deciding what trigger to use for futures.
For entries in both futures and perpetual contracts the index-price as trigger is a good tool. In price movements of the asset the average of several exchanges will follow slower due to the nature of being an average. So if a stop is used for opening a position the index price as trigger can be used, for example, to wait for a confirmation of a break out as the average price of all the exchanges we use for our index-price need to be at that level. A trader needs to keep in mind that the orderbook will move before this average is reached and thus placing a limit-order tight to the trigger probably will not be filled.
As Deribit has introduced reduce-only orders a trader can always set-up a combination of stops with the different triggers. Exit stops with reduce-only enabled can be setup with three stops, one with trigger last-price, one with trigger mark-price and one with trigger index-price. Each with their own conditions, if index price reaches X then exit, if mark-price reaches… etc. The first stop that will be triggered will close the position and reduce-only makes sure the other stops won’t open a new position. Of course it is not needed to use one stop to close the complete position. A trader can divide the quantity to execute per stop and like previous example simply choose to close one third.
zqooN — March 2019