What is Split Close
A split close is a situation that refers to price differences within a series of final daily futures-contract transactions occurring at the close of a trading session. A split close occurs if more than two contracts with the same underlying trade at different prices during the final minutes of the markets. Split closes are a common occurrence on futures exchanges, but can be considered an oddity for commodity pricing.
BREAKING DOWN Split Close
A split close happens when contracts with the same underlying instrument, but different maturity dates, have different closing prices. In other worse, if a close has two figures, it is known as a spit close. A futures contract is a type of derivative instrument in which a buyer and seller agree to transact a set of financial instruments or physical commodities for future delivery at a specified date and price.
There are many different strategies a broker might employ regarding spit closes. For example, they may choose to close the first up day or sell at the close of the first down day. A broker may make a higher profit by avoiding purchasing a stock if both closes are lower than the lowest split of the day before. Similar, they may preserve their profit margin by avoiding selling if both stocks are closing at last day’s highest split. On the other hand, if only one stock is lower or higher, it may be financially prudent to purchase.
You may also hear the term split close applied in the housing market, when a buyer and a seller partake in a split closing, in which the seller hires a different title company than the buyer for the closing. The term, however, is different than a split close involved in a trading session, so the two shouldn’t be confused.
Example of a split close
A split close can occur when two contracts have different closing dates. A number of contracts are available at any one time for a particular instrument, based on the month that the contract expires. For example, the contract months for corn futures are March, May, July, September and December. If the March and May contracts have different closing prices, a split close occurs. For example, a split close also happens if a July corn contract has a positive gain at the close, while a September corn has a loss.