Reference Prices

#Definition

Reference Prices are different ways to quote price: Bid/Ask, Midpoint, Last traded, and Mark (reference for PnL).

#Types of Reference Prices

#Bid Price

The highest price a buyer is willing to pay right now.

Example:

• 5 buyers want to pay $0.48
• 3 buyers want to pay $0.47
• Bid = $0.48 (highest)

Usage:

• Where you can sell immediately
• Lower than ask
• Market maker's buy price

#Ask Price

The lowest price a seller is willing to accept right now.

Example:

• 4 sellers asking $0.51
• 8 sellers asking $0.52
• Ask = $0.51 (lowest)

Usage:

• Where you can buy immediately
• Higher than bid
• Market maker's sell price

#Midpoint Price

The average of bid and ask.

Formula:

Midpoint = (Bid + Ask) / 2

Example:

• Bid = $0.48
• Ask = $0.51
• Midpoint = $0.495

Usage:

• Fair value estimate
• Portfolio valuation (unrealized)
• Reference for spreads
• Note: Cannot trade at mid (unless limit fills)

#Last Price

The most recent executed trade price.

Example:

• Current bid/ask: $0.48 /$0.51
• Last trade: $0.49 (happened 10 minutes ago)
• Last = $0.49

Usage:

• Recent market sentiment
• Price charts typically use last
• Caution: May be stale in slow markets

#Mark Price

A reference price for calculating unrealized PnL.

Calculation (varies by platform):

Mark = Midpoint
or
Mark = Last (if recent)
or
Mark = Index / Fair Value (advanced)

Example:

• Bid/Ask: $0.48 /$0.51
• Mark = $0.495 (midpoint)
• Your position of 1,000 shares
• Unrealized PnL = 1,000 × ($0.495 - entry price)

Usage:

• Portfolio valuation
• P&L calculations
• Margin requirements (if applicable)

#Price Relationships

#Normal Market

Bid < Midpoint < Ask

Example: $0.48 <$0.495 < $0.51

#Last Price Position

• Last = Bid: Recent sell
• Last = Ask: Recent buy
• Last between: Could be either
• Last outside: Stale data, market moved

#Visualizing Price Relationships

#Use Cases

#For Buyers

Aggressive (want immediate fill):

• Use Ask price
• Place market order
• Or limit at/above ask

Patient (wait for better price):

• Use Bid price or below
• Place limit order
• Join the queue or undercut

Fair value assessment:

• Check Midpoint
• Estimate true cost
• Compare to edge

#For Sellers

Aggressive (sell now):

• Use Bid price
• Place market order
• Or limit at/below bid

Patient (wait):

• Use Ask price or above
• Place limit order
• Wait for buyers

#For Analysis

Current fair value:

• Midpoint is best estimate
• Where market would clear
• Neither buyer nor seller advantage

Recent sentiment:

• Last price shows direction
• Consecutive highs = bullish
• Consecutive lows = bearish

#Example Market Snapshot

Market: "Will GDP exceed 3%?"

Bid:      $0.48 (500 shares)
Ask:      $0.51 (800 shares)
Midpoint: $0.495 (calculated)
Last:     $0.49 (2 minutes ago)
Mark:     $0.495 (for PnL)

Interpretation:

• Can sell immediately at $0.48
• Can buy immediately at $0.51
• Spread = $0.03 (3¢)
• Fair value ≈ $0.495
• Recent trade at mid, market balanced

#Price Display

#Platform Differences

Kalshi:

• Shows bid/ask clearly
• Last price in chart
• Mark for positions

Polymarket:

• Current buy/sell prices
• Mid implied in display
• Charts use last

Other Platforms:

• Varies
• Some show full depth
• Some simplified

#For Portfolio Valuation

#Unrealized PnL Calculation

Using Mark Price (midpoint):

Position: +1,000 shares
Entry: $0.40
Mark: $0.495
Unrealized PnL = 1,000 × ($0.495 - $0.40)
                = 1,000 × $0.095
                = $95

Why Midpoint?

• More fair than bid or ask
• Liquid exit assumption
• Standard accounting practice

Reality Check:

• To realize $95, need to sell at bid ($0.48)
• Actual exit = 1,000 × ($0.48 -$0.40) = $80
• Spread cost = $15

#Common Mistakes

#Mistake 1: Using Last for Large Orders

• Last = $0.50
• You want to buy 10,000 shares
• Wrong: Assume $0.50 cost
• Right: Check ask and depth

#Mistake 2: Ignoring Spread

• Mid = $0.495
• Think you can trade there
• Reality: Must pay ask ($0.51) or sell at bid ($0.48)

#Mistake 3: Stale Last Price

• Last = $0.30 (from yesterday)
• Market now $0.50 /$0.51
• Wrong: Think price is $0.30
• Right: Use current bid/ask

#Advanced: Fair Value

#When Prices Disagree

• Bid = $0.48
• Ask = $0.51
• Last = $0.54 (????)

Issue: Last is outside bid/ask (stale or error)

Solution: Use midpoint ($0.495) as fair value

#Weighted Midpoint

Some platforms use:

Weighted Mid = (Bid × AskSize + Ask × BidSize) / (BidSize + AskSize)

Accounts for depth imbalance.

#Practical Tips

#Always Check Bid/Ask

• Most accurate current prices
• Last can be misleading
• Mid is theoretical

#Use Appropriate Price

• Selling? Look at bid
• Buying? Look at ask
• Valuing? Use mid
• Analyzing? Consider last + spread

#Account for Spread

When calculating EV:

True Cost = Ask Price + Fees
True Exit = Bid Price - Fees
Round Trip = Ask - Bid + 2 × Fees

#Related Terms

• Bid-Ask Spread
• Order Book
• Limit Order
• Market Order
• Liquidity