Split Close
A split close (or split settlement) refers to a derivatives market pricing mechanism or practice where the daily settlement price is determined by taking the average of the bid and ask prices at the market close rather than the last traded price, or where a futures contract's closing settlement is determined across multiple sequential closing auctions. It also refers to situations in commodity futures where the spot and nearby months settle at different prices due to delivery mechanics.
Key takeaways
- Many futures exchanges use a price averaging window (e.g., the last 60 seconds of trading) rather than a single last-traded price for settlement, reducing manipulation risk from transient end-of-day price spikes.
- In options markets, a split close can refer to the computation of end-of-day implied volatilities from the midpoint of bid-ask spreads when the last trade is stale or at extreme prices.
- Split closes are particularly relevant around contract expirations when cash settlement requires a precisely defined settlement price; any ambiguity can be exploited by traders holding large opposing positions.
- Commodity futures with active physical delivery may show a 'split close' between the spot month (subject to delivery pressure and storage constraints) and deferred months, reflecting near-term supply/demand dynamics in the physical market.
- The CME's 'closing range' methodology captures a range of prices executed during a defined closing period, from which the settlement price is derived — a form of distributed measurement designed to resist point-in-time manipulation.
Explanation
The determination of a daily settlement price in futures markets serves multiple purposes: it establishes the mark-to-market value for variation margin calculation, provides a reference price for options expirations, and sets the benchmark for performance reporting. Because settlement prices have significant financial consequences — small differences can mean millions of dollars in margin transfers across the aggregate market — exchanges have developed settlement methodologies designed to be representative, manipulation-resistant, and operationally reliable.
The split close concept addresses several specific challenges in settlement price determination. In thin or end-of-day illiquid markets, a single last-traded transaction can be anomalously far from fair value. A large trader who needs to establish a position might execute a transaction at an extreme price as the last trade of the day, setting a settlement price that benefits their overall book (which includes options or swaps referencing the settlement). To address this, most major exchanges compute settlement prices from a period of transactions and/or quotes rather than a single point-in-time last trade.
At CME Group, futures settlement uses the 'closing range' methodology: during the last 90 seconds to 2 minutes of the regular trading session, a range of prices traded is recorded, and the exchange's settlement committee uses this range plus market-on-close order imbalances and prevailing bid-ask quotes to determine the final settlement price. For some contracts, settlement is the volume-weighted average of trades during the closing period. For thinly traded contracts or days with limited volume at the close, the settlement committee may use quotation midpoints rather than transaction prices.
In the context of options markets, a 'split close' situation can arise when options have not traded since much earlier in the session. The last trade price may not reflect current implied volatility conditions. Risk systems address this by computing end-of-day mark-to-market using implied volatility derived from the midpoint of the current bid-ask quote, rather than the last trade price — ensuring the mark reflects current market conditions rather than a potentially stale transaction.
For commodity markets, the physical delivery process creates natural price splits between nearby and deferred months near first notice day. As the spot month approaches delivery and storage or transportation constraints become binding, the cash and nearby futures prices can diverge significantly from deferred months. This is not a market dysfunction but a genuine reflection of near-term physical supply/demand dynamics — what traders call 'localized' or 'near-term' basis behavior. The resulting split in settlement prices across months must be accurately reflected in daily P&L calculations for spread positions.
Example
During the final minute of trading in crude oil futures, a large futures trader with a substantial position in WTI options notices that the last trade was at $78.20/barrel, but the current bid/ask is $78.10/$78.25 (mid-price $78.175). The settlement committee observes: last 90-second trade range of $78.15-$78.22, volume-weighted average of $78.18, and current quote midpoint of $78.175. Settlement is set at $78.18. For an options market maker holding 10,000 delta-equivalent contracts, the difference between $78.20 and $78.18 on settlement creates a $200,000 variation margin difference (10,000 × 100 bbl/contract × $0.02 × $1/bbl). This illustrates why precise settlement methodology matters enormously for large participants, and why exchanges are careful to use averaging windows that reduce susceptibility to last-second manipulation.
Related terms
Basis Central Limit Order Book Delivery Delta Exchange Final Settlement Price Futures Contract Implied Volatility Limit Move Margin Mark To Market Market Maker