General

Alpha5 is a digital asset derivatives exchange offering a comprehensive suite of products for the crypto ecosystem.

The current product availability consists of:

Alpha5 XBT Index

The calculation of the Index is taken from 4 different exchanges, namely Binance, Huobi, OKEx, and Poloniex. Each exchange contributes a mid-price using their respective best bid and offer prices on a continuous basis. The highest-priced and lowest-priced exchanges are discarded for each calculation, and the other 2 are averaged to derive the A5XBT Index.

In the event one of the constituent exchanges’ price feeds is unavailable, the mid of 1 out of 3 exchanges will be used to calculate the A5XBT Index. If there are only 2 constituents, both will be equally weighted, and if there is only a single feed available, that sole feed will be the A5XBT Index. In the event of no exchange feed available, trading will be temporarily halted until a connection is re-established with any one of the exchanges.

Alpha5 ETH Index

The calculation of the Index is taken from 4 different exchanges, namely Binance, Huobi, OKEx, and Poloniex. Each exchange contributes a mid-price using their respective best bid and offer prices on a continuous basis. The highest-priced and lowest-priced exchanges are discarded for each calculation, and the other 2 are averaged to derive the A5ETH Index.

In the event one of the constituent exchanges’ price feeds is unavailable, the mid of 1 out of 3 exchanges will be used to calculate the A5ETH Index. If there are only 2 constituents, both will be equally weighted, and if there is only a single feed available, that sole feed will be the A5ETH Index. In the event of no exchange feed available, trading will be temporarily halted until a connection is re-established with any one of the exchanges.

Mark Prices

The Mark Price is used for unrealised PnL calculations and liquidation purposes.

Perpetual Swap: The Mark Price is dependent on the A5XBT Index (or A5ETH Index) and the Funding Rate. In the event the Perpetual Swap deviates more than 0.5% from the A5XBT Index (or 1% for A5ETH Index), the Mark Price will be capped at the +/-0.5% deviation.

For Bitcoin: The Maximum value of the Perpetual Swap Mark Price will be (1 + 0.5%) * A5XBT Index Price and the Minimum value of Perpetual Swap Mark Price will be (1 - 0.5%) * A5XBT Index Price.

For Ethereum: The Maximum value of the Perpetual Swap Mark Price will be (1 + 1%) * A5ETH Index Price and the Minimum value of Perpetual Swap Mark Price will be (1 - 1%) * A5ETH Index Price.

Futures Contracts: The Mark Price of a futures contract is the average of Best Bid Price and Best Ask Price, so long as the average is within a set field of parameters.

The Maximum Deviation of the Mark Price for any Bitcoin Futures Contract from the A5XBT Index Price is capped at Dev = 2.5% + 15 * (Time to Expiry/365)/100

For Ethereum, the Maximum Deviation from the A5ETH Index Price is capped at Dev = 5% + 15 * (Time to Expiry/365)/100

Where Time to Expiry is the number of days left for the futures contract to expire.

Thus, Maximum and Minimum deviations possible in the Mark Price of a futures contract are:

For Bitcoin:
Mark Price (Max) = (1 + Dev) * A5XBT Index Price

Mark Price (Min) = (1 - Dev) * A5XBT Index Price

For Ethereum:
Mark Price (Max) = (1 + Dev) * A5ETH Index Price

Mark Price (Min) = (1 - Dev) * A5ETH Index Price

Futures Spreads: Any spread product’s Mark Price will be the difference between the Mark Prices of its individual legs.

Funding

The Perpetual Swap will have a funding mechanism, which will attempt to anchor the price to the A5XBT Index (or A5ETH Index). Every 8 hours, a settlement will occur as per the prevailing funding rate, during which funds will either be paid or collected by any user that has an open position in the Perpetual Swap contract at that time.

Funding will happen 3 times a day at 00:00 UTC, 08:00 UTC, and 16:00 UTC.

The funding a trader has to pay or receive is calculated as follows:

Funding = Position Value * Funding Rate

The Position Value is given as:

For Bitcoin: Number of Contracts (in BTC) * A5XBT Index Price

For Ethereum: Number of Contracts (in ETH) * A5ETH Index Price

If the rate is positive, longs (buyers) will pay the shorts (sellers). If the rate is negative, the shorts will pay the longs.

Funding is a net-zero operation for the exchange; it is payments being exchanged between buyers and sellers.

The notification for funding paid/received is shown under the Transaction History tab.

Funding Rate Calculation

A rolling average funding rate will be calculated every minute over the current 8-hour cycle. At the end of each cycle, this rolling average of the 480 values (one value for each minute over an 8-hour interval) will serve as the funding rate for the new cycle.

The Funding Rate will have 2 components:

The Interest Rate [I] and the Premium Index [P]

The Interest Rate is a highly varied figure. There is no consistent overnight cost of USD (or equivalent) and BTC (or ETH). As a result, Alpha5 will look to amplify this figure, to create opportunities between varied rates across the industry.

To do so, Alpha5 will reference:

Interest Rate permanently (until further notice) as 0.03% per day (i.e. 0.01% for every 8-hour cycle). [I] = 0.01 % for all calculations.

The Premium Index will be derived according to the following formula:

Premium Index [P] = (Max(0, Bid Price - Mark Price) – Max (0, Mark Price – Ask Price))/ (A5XBT Index or A5ETH Index) + (Funding Rate of Current Interval * (Time Until Funding / Funding Interval))

Where Mark Price is calculated as:

Funding Basis = Funding Rate of Current Interval * (Time Until Funding / Funding Interval)

Mark Price = Index Price * (1 + Funding Basis)

For Bitcoin:

Funding Rate [F] = Premium Index [P] + clamp(Interest Rate [I] – Premium Index [P], 0.05%, -0.05%)

Thus, if (I-P) is within +/- .05%, then F = P + (I-P) = I

If this is the case, F will equal I = 0.01%

For Ethereum:

Funding Rate [F] = Premium Index [P] + clamp(Interest Rate [I] – Premium Index [P], 0.10%, -0.10%)

Thus, if (I-P) is within +/- .10%, then F = P + (I-P) = I

If this is the case, F will equal I = 0.01%

Note: Funding Rate Cap: (Initial Margin – Maintenance Margin) * 25%

Futures Expiration

The Futures settlement price is the price at which a Future expires. It is tabulated as the 30-minute time-weighted average from 07:30 to 08:00 UTC, with each instance being observed every 1 minute, for a total of 30 inputs into the expiration price calculation.

Margin Trading

Margin Trading allows for the use of leverage. This means that you may trade a higher notional value than what you have available. The amount of funds you have available tends to act as collateral against the value of your position.

The leverage offered on Alpha5 is 25x.

Initial Margin

The Initial Margin is the Margin required to open a position. This is a notional amount that is reserved for each account.

Initial Margin is reserved for all open positions and all open orders, except for orders that would reduce any open positions (where no extra Initial Margin is reserved).

It is calculated simply as: Notional Amount * 1/Leverage

On Alpha5 IM is 4%.

Bitcoin Example:

A trader deposits 1,000 USDT and opens a long position of 1 BTC in the Perpetual Swap with
the trade price being 10,000 USDT.

The Initial Margin reserved would be: 10,000*1/25 = 400 USDT.

Thus, from the 1,000 USDT initially deposited, 600 USDT would be the Available Balance.

Ethereum Example:

 A trader deposits 1,000 USDT and opens a long position of 10 ETH in the Perpetual Swap with 
 the trade price being 400 USDT.

 The Initial Margin reserved would be: 4,000*1/25 = 160 USDT.

 Thus, from the 1,000 USDT initially deposited, 840 USDT would be the Available Balance.

Maintenance Margin

Maintenance Margin is the amount of Margin that must be available at all times for a trader to keep full control over their account.

Should the Maintenance Margin drop below a certain level, Alpha5 will begin to partially liquidate any open orders or positions to bring the account back above the Maintenance Margin level.

It is calculated simply as: Notional Amount * Maintenance Margin Threshold.

On Alpha5 the MM threshold is 2%.

Bitcoin Example:

A trader deposits 1000 USDT, and buys 1 BTC in the Perpetual Swap,
at 10,000 USDT.

The Initial Margin reserved is 400 USDT. The MM threshold is 200 USDT.

Meaning if the account value drops to 200 USDT (10,000 * 2%), liquidations will commence. 

Ethereum Example:

A trader deposits 1000 USDT, and buys 10 ETH in the Perpetual Swap,
at 400 USDT.

The Initial Margin reserved is 160 USDT. The MM threshold is 80 USDT.

Meaning if the account value drops to 80 USDT (4,000 * 2%), liquidations will commence.

Profit and Loss

All PnL is settled in USDT. For any given trade, the PnL (before any trading fees) would be tabulated as:

Number of Contracts (in BTC or ETH) * [Exit Price - Entry Price]

Realized PnL

Realized PnL (RPL) is any PnL that has accrued from closed positions, trading fees, and funding fees.

Unrealized PnL

Unrealized PnL (UPL) is the running PnL of any open position. Unrealized PnL is immediately available for use in the trader’s Equity as part of Alpha5’s cross margining offering.

It is calibrated to the Mark Price of the instrument.

Note: The Mark Price can be different at any given point in time from the rate at which the market is trading. Thus, it is entirely possible that the immediate opening of a position has a negative or positive PnL based on where the Mark Price is.

Average Entry Price & PnL Calculations

Average Entry Price is obtained by dividing the total contract value in USDT by the Total number of contracts (in BTC or ETH).

Total contract value in USDT = [(Number of Contracts1(BTC or ETH) * Price1) + (Number of Contracts2(BTC or ETH) * Price2) + (Number of Contracts3(BTC or ETH) * Price3)....]

Please note that the average entry price for a position changes only if the position size is increased, not if it is reduced.

Bitcoin Example:

Suppose you enter a long position (buy) of 1 BTC contract in XBTUSD at $6000

You then enter another long position of 1 BTC contract in XBTUSD at $5000 and
another long position of 1 BTC contract when XBTUSD price is $7000

Therefore, Contract Value (in USDT) = 1 * 6000 + 1 * 5000 + 1 * 7000 = 18,000 USDT

Total Amount (BTC)) = 1 + 1 + 1 = 3 BTC

Average Entry Price = Total Contract Value/ Total Amount (BTC) = 18000/3 = $6000

Now suppose, after several days the Mark Price for XBTUSD is $9050

Your unrealised PnL will be calculated as follows:

Unrealised PnL = Total Amount (BTC) * [Mark Price - Average Entry Price] = 3*[9050 - 6000] = 9150 USDT

Now, suppose you exit at $9000 by selling half your total position,

i.e. 1.5 BTC contracts, then your Realised PnL will be calculated as follows:

Realised PnL = Amount (BTC) Sold for this Position * [Exit Price - Average Entry Price for this position]

= 1.5 * [9000 - 6000] = 4500 USDT

The average entry price remains unchanged at $6000 for the now net position of
long 1.5 BTC contracts since the position was reduced with respect to the earlier scenario.

Suppose you now buy another 1.5 BTC contracts when the market is at $10,000.

Then, the new average entry price (since the position has increased) will be given as:

Contract Value (in USDT) = 1.5 * 6000 + 1.5 * 10000 = 24,000 USDT

Total Amount (BTC) = 1.5 +1.5 = 3 BTC

Average Entry Price = Total Contract Value/ Total Amount (BTC) = 24000/3 = $8000

Ethereum Example:

Suppose you enter a long position (buy) of 1 ETH contract in ETHUSDT at $400

You then enter another long position of 1 ETH contract in ETHUSDT at $350 and
another long position of 1 ETH contract when ETHUSDT price is $450

Therefore, Contract Value (in USDT) = 1 * 400 + 1 * 350 + 1 * 450 = 1,200 USDT

Total Amount (ETH)) = 1 + 1 + 1 = 3 ETH

Average Entry Price = Total Contract Value/ Total Amount (BTC) = 1200/3 = $400

Now suppose, after several days the Mark Price for ETHUSDT is $600

Your unrealised PnL will be calculated as follows:

Unrealised PnL = Total Amount (ETH) * [Mark Price - Average Entry Price] = 3*[600 - 400] = 600 USDT

Now, suppose you exit at $600 by selling half your total position,

i.e. 1.5 ETH contracts, then your Realised PnL will be calculated as follows:

Realised PnL = Amount (ETH) Sold for this Position * [Exit Price - Average Entry Price for this position]

= 1.5 * [600 - 400] = 300 USDT

The average entry price remains unchanged at $400 for the now net position of
long 1.5 ETH contracts since the position was reduced with respect to the earlier scenario.

Suppose you now buy another 1.5 ETH contracts when the market is at $650.

Then, the new average entry price (since the position has increased) will be given as:

Contract Value (in USDT) = 1.5 * 400 + 1.5 * 650 = 1,575 USDT

Total Amount (ETH) = 1.5 +1.5 = 3 BTC

Average Entry Price = Total Contract Value/ Total Amount (ETH) = 1575/3 = $525

Equity, Available Balance, and Firepower

Equity is the total value of your account at any given point in time. It is checked by the liquidation engine to ensure compliance to the Margin thresholds.

Available Balance is used to determine if there are sufficient funds for order placement.

By definition: Available Balance = Equity – Initial Margin (IM)

Firepower is displayed at the top of a trader’s dashboard. It is an optical look at the percentage of capital of your portfolio that is available for use and is calculated as: Available Balance/Equity. The higher the figure, the more you are able to do with your account.

Bitcoin Example:

A trader deposits 1,000 USDT. That is their Equity. At the beginning, this is also their Available Balance.

If they buy 10,000 USDT of an XBT Perpetual Swap (i.e. XBTUSD(Perp)), with IM at 4% and fees of 0.05%,

Available Balance = 1,000 - .04*10,000 - .0005*10,000 = 595 USDT

Ethereum Example:

A trader deposits 1,000 USDT. That is their Equity. At the beginning, this is also their Available Balance.

If they buy 4,000 USDT of an ETH Perpetual Swap (i.e. ETHUSDT(Perp)), with IM at 4% and fees of 0.05%,

Available Balance = 1,000 - .04*4,000 - .0005*4,000 = 838 USDT

If opening any new order would require IM > Available Balance, the order will be rejected.

Margin Notification, Calls, and Liquidations

When a trader’s account has its Equity < IM, a notification will be sent via email to let the trader know. At this juncture, the trader is unable to place any orders that increase margin requirement. They are still able to sell any of their positions, close any open orders, or increase their account balance by way of depositing more funds.

If a trader’s account has its Equity < MM, the Alpha5 Risk Engine will take over the trader’s account. All open orders will be cancelled and the trader’s positions will be sent to the market for liquidation, a process during which the trader will have no control of their account. This will continue until Equity > MM.

Alpha5 charges 0.75% on liquidation orders.

A trader can avoid liquidations by being prudent and employing effective risk management. This may include:

  • Reducing Position Size

  • Setting Stop-Loss Orders

  • Depositing More Funds

The Alpha5 Risk Engine will not try and market-sell the trader’s entire position. Its intent is to create a continuous flow of smaller orders in an attempt to limit market impact, and to try and have Equity > MM to restore control to the trader.

Insurance Fund

Alpha5 operates an Insurance Fund that is capitalized by liquidation fees (see Fees). In the event the Risk Engine incurs a loss beyond the remaining Equity of the liquidated trader, the Insurance Fund will cover the difference.

Due to Alpha5 employing a lower leverage ratio (25x vs. 100x exchanges in the ecosystem), it would take repeated, large movements, to have to constantly utilize the Insurance Fund. Therefore, it is likely that the Insurance Fund would continue to be capitalized even if a few accounts had adverse outcomes.

However, as a contingency, in any extraordinary circumstances, where the Insurance Fund is also depleted, a mechanism to socialize losses amongst profitable traders may be employed. Alpha5 will make efforts to predict such risks, and may revise margin requirements in an attempt to curb such outcomes. Notice of this will be provided.

Implied Orderbook Logic

One of the key features of Alpha5 is implied orderbook logic. This allows for the immediate combination of liquidity.

For instance, if the XBT Perpetual Swap (i.e. XBTUSD(Perp)) and June 2020 Future (i.e. XBTM20(Fut)) orderbooks had prices, Implied Orders (fully tradeable) would be created in the XBT Perp – Jun Fut swap (i.e. XBTUSD:M20), the price differential could be traded with a single click. There would be no risk of execution on a single-leg, and no hassle of manually managing a position.

Same for Ethereum, where if the ETH Perpetual Swap (i.e. ETHUSDT(Perp)) and June 2020 Future (i.e. ETHM20(Fut)) orderbooks had prices, Implied Orders (fully tradeable) would be created in the ETH Perp – Jun Fut swap (i.e. ETHUSDT:M20), the price differential could be traded with a single click.

This logic, which is implemented on sophisticated legacy exchanges, serves as the bedrock for deepening the infrastructure of interest rate and futures markets.

There are two-types of Implied Orders: In and Out

Implied-In orders are as mentioned above. Prices of single futures legs are combined to create a price in a swap between them, synthetically. These prices adjust dynamically just as those futures adjust.

Implied-Out orders go in reverse. An order that is placed in a swap would populate the individual futures legs.

This logic is a key cornerstone of the Alpha5 offering and is embedded.

Cross Margin

Alpha5 categorizes its margin implementation as Cross Margin. There are various iterations in the market that are curated with different parameters.

On Alpha5 IM on Perpetual Swaps and Futures if 4%. MM on the same products is 2%. Any Unrealized PnL is immediately available for use and is added to the Available Balance. IM is reserved on every position and on every order. However, any order that is created that would reduce a current position will not be charged IM.

If an account falls below IM, but is still above the MM threshold, it is NOT subject to liquidation. However, in such an instance, a trader can only close positions/orders, or add capital. Below MM, the Alpha5 Risk Engine takes over the account of a trader in a bid in an attempt to reduce account exposure to bring Equity > MM.

Deposits and Withdrawals

At any given point in time, a trader may request a withdrawal up to their Withdrawal Balance. This will in most instances be equal to the Available Balance.

As a function of a secure and complex storage process, Alpha5 processes withdrawals readily, but does not directly hold any client funds. As a result, there may be a lag on real-time withdrawals, though the team will endeavour to process all withdrawals as seamlessly as possible.

Once you have requested a withdrawal, it is sent for approval. Post approval, the transaction will broadcast to the blockchain and you will receive your funds post the requisite number of confirmations on the network. (Note depending on the receiving wallet, the number of confirmations required may vary. This is not something Alpha5 controls). Withdrawals can take longer in case the network mempool has a lot of traffic. You may always view the status of your transaction by tracking the transaction ID in a blockchain explorer.

Please note that Alpha5 bears no responsibility for loss of funds if they are requested to be withdrawn to an incorrect address. The trader must take due care in all instances to ensure that the funds are being withdrawn to an address they intended, and that such address is indeed a compatible address with the cryptocurrency that is being withdrawn.

Alpha5 Risk Engine

Alpha5 operates an advanced risk measurement and liquidation process. Using a proprietary methodology, Alpha5 sends partial orders for liquidations, with the aim of incrementally increasing Equity > MM to preserve account balances and reinstate control of the account to the trader.