Settlement Price Distortion

Settlement Price Distortion happens when the final price used to settle a derivative contract does not accurately reflect the true market value of the underlying asset. This can occur due to low liquidity at the time of settlement, manipulation of the spot price, or technical failures in the settlement mechanism.

When settlement prices are distorted, it leads to unfair outcomes for traders, as they may be forced to settle at prices that do not align with their expectations. To mitigate this, many exchanges use a time-weighted average price or a median price from multiple sources to determine the settlement value.

This ensures that the price is resistant to momentary spikes or intentional manipulation. Protecting the integrity of the settlement process is fundamental to the long-term viability of any derivative product.

It is a critical area of focus for protocol designers and risk managers.