Understanding Xena Listed Perpetuals

Trading of Xena Listed Perpetuals involves risk. Transactions should only be entered into by traders and investors who understand the nature and extent of their rights, obligations and risks.


What is a Xena Listed Perpetual?

A Perpetual is a cryptocurrency-settled derivative contract intended to mock the spot price of an underlying asset or index. Each contract is an agreement between a buyer and a seller to exchange the difference in value of a particular instrument between when the contract is opened and when it is closed. The difference is determined by reference to an ‘underlying’, that can be a real asset like Bitcoin, or some index calculated by predefined rules, for example, volatility of Bitcoin.

All perpetuals are settled in cryptocurrency.

Xena Listed Perpetuals are leveraged instrument. This means that you are fully exposed to price movements of the underlying instrument without having to pay the full price of that instrument. Perpetuals therefore offer the potential to make a higher return from a smaller initial outlay than investing directly in the underlying security. Leverage, however, usually involves more risks than a direct investment in the underlying. It is important to understand that this effect may work against as well as for traders – the use of leverage can lead to large losses as well as large gains.

All the Perpetuals are standardised and are traded in a public order book. All the trades occur between Xena Exchange clients; Xena Exchange itself is not a party of any trade.

Xena Exchange offers Listed Perpetuals for the major cryptocurrencies and some indices over cryptocurrencies market. The full list of Perpetuals can be found on https://xena.exchange/perpetuals.



Advantages of trading Perpetuals

There are different types of derivative contracts that have been used by professional traders on traditional financial markets for decades, including forwards, futures, CFDs, FX rolling swaps, and others. Some of them are traded over-the-counter (OTC), and some — on public exchanges. All are suited for specific purposes and have both pros and cons.

Xena Listed Perpetuals have all the advantages of the mentioned contract types:

  • Leverage: Perpetuals enable you to obtain full exposure to the underlying cryptocurrency or index for a fraction of the price of buying the underlying. Perpetuals require only a small initial margin to secure a trade.

  • The ability to go ‘short’: Perpetuals allow traders to take advantage of falls in prices. This means that traders can profit when prices are going down, not just up. Perpetuals are thus an excellent trading and hedging tool.

  • Simplicity

    • Non-expiry: Perpetuals do not have an expiry. For contracts that do not expire, the only way to close a position is to trade the opposite side of the position.

    • The Perpetual mirrors the price of the underlying: Unlike other forms of derivatives (i.e. options and futures), cashflows such as carry costs or interest rates are not reflected in the price of a Perpetual. Instead, cashflows are paid whilst the position is open, allowing Perpetual prices to track the underlying instrument rather than trade at a discount or premium, as can be the case in other forms of derivatives.



Benefits of Xena Perpetuals

Retail traders and investors can be confident trading Xena Listed Perpetuals because of the unique attributes of exchange traded markets. These include:


Market Independence

Unlike many OTC venues (like Forex brokers), Xena Exchange is not a party of any trade. All trades occur between clients of the exchange. There is no explicit or hidden intention for us to manipulate the execution prices in any way. The prices of Perpetuals are defined by the supply and demand balance of the market and by certain predefined measures, that are required to keep the price of a Perpetual close to the price of its underlying. These measures are explicitly described in the contract specifications and rules of trading.


Transparency

Transparency is a key ingredient in a well informed market. Xena Exchange reports on all Xena Listed Perpetuals transacted, open positions, bids, offers and their volumes. In fact, all the market information you are used to seeing when trading on an exchange. This means a fundamentally better informed market.

  • All prices are formed in a fully transparent manner in Xena Exchange order book. Each trader’s order is combined in the Xena Exchange Perpetuals order book with those from other market participants, including market makers, and becomes an integral part of the price discovery process.

  • All trades are executed on a strict price/time priority. Price/time priority means the first person to enter the best price is traded against first. This results in everyone in the central market order book being treated fairly and consistently, no matter how big or small a trader you are.

  • Importantly, while prices are transparent, the individual trader remains anonymous, which minimises market impact costs (especially those related to others identifying an individual’s trading patterns and trading ahead of him/her).

  • Anyone can place into the market a better bid or offer, as is the case in all exchange based markets. No-one is forced to accept the price offered in the market. However, once an order is executed, you are committed to settle the trade. All prices in the market are firm in the volume indicated.

  • The Xena Listed Perpetuals order book will include orders from market makers. Their activities help ensure the Xena Listed Perpetuals market has competitive prices and deep liquidity. Market makers operate on common conditions and do not have any advantages (like last look) in comparison with other traders.



Tracking Positions and Costs

Trading fees

Each trade executed in Xena Listed Perpetuals order book is subject to trading fees. The trading fee rate depends on whether you were a maker (put a limit order that added liquidity to the order book) or a taker (put a market, stop or limit order that removed liquidity from the order book). Current fee rates are published in the separate article.


Margins

Margins are designed to protect the financial security of the market by ensuring that you can meet your obligations. If you trade a Xena Listed Perpetual, you have a potential obligation to the market because the price may move against you.

Whenever 1) you send an order and 2) it gets executed, Xena Exchange calculates the margin necessary to ensure you can meet your trading obligations until the next hourly settlement.


Initial Margins

Initial Margins apply to both buyers and sellers upon opening a contract. They protect from risk resulting from a negative movement in the value of a position as a result of a change in market prices. The Initial Margin is typically set at a level designed to cover reasonably foreseeable losses on a position between two consecutive hourly settlements. The amount of Initial Margin for each contract varies according to the price volatility of the underlying, and is defined in the contract specification and published at https://xena.exchange/perpetuals.

Initial Margins are returned when the contract is closed out.


Maintenance Margins

Maintenance Margins are calculated whenever you open a Xena Listed Perpetual position, and indicates the minimal equity of your account required to carry the position. If the equity fails below the Maintenance Margin, your positions will be closed by Xena Exchange through the liquidation process. Maintenance Margins protect from execution slippages during the liquidation and significantly decrease the risks of balance of one’s account becoming negative.

Maintenance Margin rate is normally a half of the Initial Margin rate and is chosen taking instruments volatility and liquidity into account. Margin rates are defined in the contract specification and published at https://xena.exchange/perpetuals.


Variation Margins

In addition to the Initial Margins required to open contracts, any adverse price movements in the market must be covered by further payments, known as variation margins. The Variation Margin is based on the hourly marked to market revaluation of an Xena Listed Perpetual position. In other words, the unrealised profit or loss, calculated for each of your Xena Listed Perpetual positions using the price of the underlying index, is settled to your account.


How margins are met

You are required to provide collateral to cover your margin obligations. Collateral in Bitcoins must be deposited to your margin account.


Payment of margins

Margins are recalculated on the hourly basis to ensure an adequate level of margin cover is maintained. However, in exceptional circumstances, margins may be recalculated intra-hour. This means that you may have to pay more if the market moves against you. If the market moves in your favour, margins may fall. Settlement requirements for trading Xena Listed Perpetuals are strict. The amount of collateral on your account must be sufficient to pay increased margins at each hourly settlement to avoid liquidation of your positions.


Cash flows

Unlike other forms of derivatives (i.e. options and futures) cashflows such as carry costs are not reflected in the price of a Xena Listed Perpetual. Instead cashflows are paid whilst the position is open, allowing Xena Listed Perpetual prices to track the underlying security rather than trade at a discount or premium, as can be the case with other types of derivatives.

Xena Listed Perpetuals have 2 distinctive cashflows that impact on holders of an open position:

  • Premium

  • Risk Adjustment


Holders of long positions

Holders of short positions

Premium — if the price of a Perpetual is higher than the price of the underlying

Pay

Receive

Premium — if the price of a Perpetual is lower than the price of the underlying

Receive

Pay

Risk Adjustment

Pay

Pay


Both cashflows are calculated and settled at each hourly clearing.


No regular interest payments

Many form of derivatives (like FX CFDs) include regular interest payments (also known as swaps). Swaps reflect the difference between the cost of borrowing the quote currency and lending the base currency. If there were no swaps, no-risk earning on the swap rate would be possible, and due to that price of a derivative and its underlying would differ.

On the cryptocurrency market, there is no reliable source of the lending rates that reflect the real state of the market and can be used as a reference (like the LIBOR rate on the traditional finance markets). Discoverable lending rates are highly volatile and prone to manipulations, that makes their usage in any derivatives impossible.

At the moment, no Xena Listed Perpetuals imply regular payments of the interest. Another approach (Premium payments) is used to align prices of Perpetuals with prices of their underlying assets.

Once the cryptocurrency money market evolves and trustable lending rate sources appear, Xena Exchange will review the specifications of Xena Listed Perpetuals to include the market interest rates.


Premium

Premium is used to push prices of a Xena Listed Perpetual to the price of its underlying. The premium is calculated and paid at each hourly settlement. Exact calculation may differ from one Perpetual to another and is described in the contract specification of a particular Perpetual. Currently anticipated Premium rates are published on https://xena.exchange/perpetuals.

If the price of a Perpetual at the moment of an hourly settlement is higher than the price of its underlying, the Premium Rate is positive, that means that holders of longs positions will pay to the holders of short positions. Knowing that, longs will tend to close their positions (i.e. sell the Perpetuals on the market), thus pushing the price down. The same happens if the price of the Perpetual is below the price of the underlying: shorts will have to pay longs at the hourly clearing; the holders of the short positions will try to close them (i.e. buy the contracts on the market), pushing the price up.


Risk adjustment

Risk adjustment is the hourly cost charged by Xena Exchange for holding an open position in a Xena Listed Perpetual.

The Risk Adjustment rate is set by Xena Exchange and is paid hourly by both long and short positions. The Risk Adjustment can be changed by Xena Exchange in response to market circumstances. The rate can move up and down but is expected to be adjusted only infrequently.

Traders are able to view current Risk Adjustment rates and any upcoming changes on the Xena Exchange website at https://xena.exchange/perpetuals.



Price formation

What keeps the Xena Listed Perpetuals price in line with the underlying price?

The price of an Xena Listed Perpetuals is closely related to the price of its underlying instrument or index. There are five factors that ensure this outcome:

  • Positions are marked using the value of the underlying index. For example, the average price of Bitcoin traded on three major exchanges (Bitstamp, CoinBase Pro, and Kraken), that is used as the underlying index for the XBTUSD Perpetual, is now $3'650. A trader opening long position in XBTUSD at, say, $3'700, will immediately have unrealised loss of $50 for each 1 BTC of his position value. Knowing that, he would not accept such high offer and enter into such trade.
  • Hourly clearing using the underlying index price. Each hour unrealised profit and loss of all active positions is settled to the traders' accounts.
  • Arbitrage: the arbitrage between a Xena Listed Perpetual and the underlying instrument will ensure both markets remain at or close to parity. This arbitrage is based on the opportunity for traders to profit whenever the two markets are out of line. For example, assume that Bitcoin is trading at $3'650 bid and $3'652 offered. If the Xena XBTUSDT Listed Perpetual is offered below the bid (e.g. at $3'640), a trader will profit from buying the Xena XBTUSD Perpetual at the lower price and selling the real Bitcoin at $3'650. 
  • Premium payments paid at each hourly clearing. The premium is calculated as the difference between the volume-weighted average bid and offers price of a Perpetual, and the price of the underlying index. If at the clearing time the VWAP of bids and offers of the XBTUSD Perpetual is $3'700, and the index price is $3'650, all holders of longs positions will be charged $50 for each 1 BTC of the position value; and all holders of short positions will be paid the same amount. Knowing that, holders of longs positions will tend to close their long positions by selling the contracts on the market and, hence, pushing the price of the Perpetual down. If the Perpetual is traded below the index, holders of short positions will pay to holders of long positions; thus, they will try to close their short positions by buying on the market, pushing the price of the Perpetual up.
    • Note that the difference must exceed a certain threshold for the Premium to be charged and paid
  • All trades involving Xena Listed Perpetuals can occur only within the relatively narrow range (Price Range) around the price of the underlying index.


Risks of trading Xena Listed Perpetuals

Xena Listed Perpetuals are not suitable for all traders and investors. In light of the risks associated, you should only trade them if you are confident that you understand Xena Listed Perpetuals and the risks. Before trading Xena Listed Perpetuals you should carefully assess your experience, investment objectives, financial resources and all other relevant considerations and consult your adviser. Among the main risks of trading Xena Listed Perpetuals are the following:


Implications of leverage

Leverage (or gearing) is the use of given resources in such a way that the potential positive or negative outcome is magnified. Xena Listed Perpetuals are leveraged. They offer the potential to make a higher return from a smaller initial outlay than for a non-leveraged transaction such as direct share investing. The example illustrates the effect of leverage on a long Xena Listed Perpetual position. The table compares the possible purchase of 1 lot (value worth 100’000 USDT) long XBTUSDT Perpetual and 25 Bitcoins. The higher percentage return from the Xena Listed Perpetuals demonstrates how leverage can work.


Bitcoin

XBTUSDT Perpetual

Opening contract value

Quantity purchased

25 BTC

1 lot (100’000 USDT)

Price

4000 USDT per BTC

4000 USDT per contract

Position value

25 BTC / 100’000 USDT

25 BTC / 100’000 USDT

Capital outlay (with 1% initial margin for the Perpetual)

25 BTC

0.25 BTC

Closing contract value

Quantity held

25 BTC

1 lot (100’000 USDT)

Market/closing price

3960 USDT per BTC

3960 per contract

Position value

25 BTC / 99’000 USDT

25 BTC / 99’000 USDT

Gross profit/loss

-1000 USDT (~ -0.26 BTC)

-1000 USDT (~ -0.26 BTC)

Gross return on initial capital outlay

-1 %

-100%


The initial outlay of capital is small relative to the total position value. Consequently, a relatively small market movement has a proportionately larger impact on the amount of funds supporting the position. It is important to remember that leverage can work both for and against you by magnifying gains and losses.


Additional margin calls and unlimited loss

It is important to note that the liability for a holder of either a long or short Xena Listed Perpetual position is not limited to the margin paid. If the market moves against a position or margin levels are increased, then the holder of that position may be called upon to pay additional funds on short notice to maintain the position.

If a holder of a position fails to comply with a request for additional funds within the time prescribed, Xena Exchange may close out the position. In addition, the holder will still be liable for any further losses that may have resulted from the position being closed out.

Note: The potential for loss is not limited to the amount of money paid as Initial and Variation Margins. Adverse market moves can result in losses being a multiple of the Initial Margin originally provided to support the position. For a holder of a short position, a continuing adverse market price movement (e.g. market price rise), can result in theoretically unlimited losses being accumulated.


Liquidity risk

Market conditions (for example, lack of liquidity) may increase the risk of loss by making it difficult to effect transactions or close out existing positions.

Normal pricing relationships may not exist in certain circumstances. For example, normal pricing relationships may not exist in periods of high buying or selling pressure, high market volatility or lack of liquidity in the market for a particular Xena Listed Perpetual.

Gapping, whereby a market price falls or rises without the opportunity to trade, can result in significant losses even when a stop loss has been put on. This is because it may not be possible to transact at the nominated price if the market has gapped.

Furthermore, there are limited circumstances in which Xena Exchange may expire and delist the contract.


Market disruptions / emergencies & issue resolution

Xena Listed Perpetual transactions are subject to the Xena Exchange Rules of Operations. Under these, certain trading disputes between market participants (for example errors involving traded prices that do not bear a relationship to fair market or intrinsic value) may lead to Xena Exchange cancelling or amending a trade. In these situations your consent is not required for the cancellation of a trade.

In some circumstances underlying instruments or securities may be halted, suspended from trading or have their quotations withdrawn from the exchange. These factors will directly affect a Xena Listed Perpetual value.