Explain the Concept of “Basis Trading” in Relation to Mark Price and Spot Price Divergence

Basis trading is an arbitrage strategy that exploits the difference, or "basis," between the price of a futures contract (which uses the mark price) and the price of the underlying asset (the spot price). When the mark price significantly diverges from the spot price, traders can profit by simultaneously taking a long position in the cheaper asset and a short position in the more expensive asset.

This trading activity helps to push the two prices back toward convergence.