Index price
What is an index price, and why do traders look at a combined spot reference instead of one exchange's quote?
In plain words
An index price is a single reference price for an asset, built by combining spot prices from several exchanges, usually after removing outliers and weighting by liquidity. Derivatives such as perpetual futures use it to compare their own traded price and, in many designs, to settle positions and calculate payments.
Why it matters
A single venue can be thin, stale or temporarily distorted, so its quote alone may misstate the market. A combined index smooths that out, which matters whenever a position is marked, a margin requirement is checked or a payment between longs and shorts is decided off that reference.
In a real week: ETH, week of 26 August 2019
For ETH in the week of 26 August to 1 September 2019, the spot quote of the kind an index combines opened at 186.54 and closed at 170.74, a return of -8.47%. Its weekly high was 193.70 at 01:00 UTC on Monday and its low 163.61 at 14:00 UTC on Thursday, a range of 18.39%. The largest one-hour move was -6.7% at 18:00 UTC on Wednesday, the kind of swing an index is designed to survive without one venue's quote dominating the reading.
A common mistake
Treating the index as a tradable price. It is a reference; you cannot execute at it. A contract's own price can sit above or below the index, and that gap is the basis.