Why Is Using a Single Exchange’s Price for Settlement Considered Risky?

Relying on one exchange creates a single point of failure, making the settlement price vulnerable to manipulation. A trader could execute large trades on the spot market to artificially alter the price and profit from a derivatives position.

This method also exposes contracts to the specific exchange's operational risks, such as downtime, API failures, or liquidity issues. Thin liquidity can lead to volatile, unrepresentative prices, causing unfair settlements.

Using a price index from multiple exchanges is the standard way to mitigate these risks.