Backwardation A market in
which futures prices are progressively lower in the distant
delivery months; the opposite of Contango. See also Inverted
Market.
Basis The difference
between the current cash price of a commodity and the futures
price of the same commodity.
Bear Market (Bear/Bearish)
A market in which prices are declining. A market participant who
believes prices will move lower is called a bear. A news item is
considered bearish if it is expected to produce lower prices.
Bid An expression
indicating a desire to buy a commodity at a given price; the
opposite of Offer.
Board of Trade See Contract
Market.
Broker A person paid a fee
or commission for acting as an agent in making contracts, sales,
or purchases. In futures trading, the term may refer to (1) a
Floor Broker - a person who actually executes orders on the
trading floor of an exchange; or (2) an Account Executive or
Associated Person - the person who deals with customers in the
offices of a Futures Commission Merchant or Introducing Broker;
or (3) a Futures Commission Merchant or Introducing Broker.
Bucketing Directly or
indirectly taking the opposite side of a customer's order into
the brokers own account or into an account in which the broker
has an interest, without open and competitive execution of the
order on an exchange.
Bull Market (Bull/Bullish)
A market in which prices are rising. A participant in futures who
believes prices will move higher is called a bull. A news item is
considered bullish if it is expected to bring on higher prices.
Buying Hedge See Long
Hedge.
Call Option The buyer of a
call option acquires the right but not the obligation to purchase
a particular futures contract at a stated price on or before the
particular date.
Carrying Broker A member of
a futures exchange, usually a clearinghouse member, through whom
another broker or customer chooses to clear all or some trades.
Carrying Charge The cost of
storing a physical commodity, such as grain or metals, over a
period of time. Includes insurance, storage and interest on the
invested funds as well as other incidental costs. In interest
rate futures markets, it refers to the differential between the
yield on a cash instrument and the cost of the funds necessary to
buy the instrument.
Cash Commodity The actual
physical commodity as distinguished from the futures contract
based on the physical commodity. Also referred to as Actual
Cash Market A place where
people buy and sell the actual commodities. See also Forward
(Cash) Contract and Spot.
Cash Settlement A method of
settling certain futures or options contracts whereby the seller
pays the buyer the cash value of the commodity traded according
to a procedure specified in the contract.
Charting The use of graphs
and charts in the technical analysis of futures markets to plot
price movements, volume, open interest, or other statistical
indicators of price movement. See also Technical Analysis.
Circuit Breaker A system of
trading halts and price limits on equities and derivatives
markets designed to provide a cooling-off period during large,
intraday market declines.
Clearing The procedure
through which the clearing house or association becomes the buyer
to each seller of a futures contract and the seller to each
buyer, and assumes responsibility for protecting buyers and
sellers from financial loss by assuring performance on each
contract.
Clearing House An agency or
separate corporation of a futures exchange that is responsible
for settling trading accounts, collecting and maintaining margin
monies, regulating delivery, and reporting trade data.
Clearing Member A member of
an exchange clearinghouse. All trades of a non-clearing member
must be registered and eventually settled through a clearing
member.
Close (the) The period at
the end of the trading session, officially designated by the
exchange, during which all transactions are considered made
"at the close".
Closing Range A high and
low range of prices at which futures transactions took place
during the close of the market.
Commission A fee charged by
a broker to a customer for performance of a specific duty, such
as the buying or selling of futures contracts.
Commission House See Futures
Commission Merchant.
Commodity Exchange Act The
federal act that provides for federal regulation of futures
trading.
Commodity Futures Trading
Commission (CFTC) The 1974 - established federal regulatory
agency that administers the Commodity Exchange Act. The federal
oversight agency which monitors the futures and options on
futures markets to detect and prevent price distortion and market
manipulation and to protect the rights of customer who use the
markets for either commercial or investment purposes.
Commodity Pool An
enterprise in which funds contributed by a number of persons are
combined for the purpose of trading futures or options contracts.
Commodity Pool Operator (CPO) An
individual or organization which operates or solicits funds for a
pool, that is, an enterprise in which funds contributed by a
number of persons are combined for the purpose of trading futures
or options contracts. Generally required to be registered with
the Commodity Futures Trading Commission.
Commodity Trading Advisor (CTA)
A person who, for the compensation or profit, directly or
indirectly advises others as to the value of or the advisability
of buying or selling futures or options contracts. Providing
advice indirectly includes exercising trading authority over a
customer's account. Registration with the Commodity Futures
Trading Commission is generally required.
Confirmation Statement A
statement sent by a Futures Commission Merchant to a customer
when a futures or options position has been initiated. The
statement shows the number of contracts bought or sold and the
prices at which the contracts were bought or sold. Sometimes
combined with a Purchase and Sale Agreement.
Contango A market situation
in which prices in succeeding delivery months are progressively
higher than in the nearest delivery months; the opposite of Backwardation.
Contract A term of
reference describing a unit of trading for a commodity future or
option.
Contract Market A board of
trade designated by the Commodity Futures Trading Commission to
trade futures or option contracts on a particular commodity.
Commonly used to mean any exchange on which futures are traded.
Contract Month The month in
which delivery is to be made in accordance with a futures
contract.
Convergence The tendency
for prices of physical commodities and futures to approach one
another, usually during the delivery month.
Covered Option A short call
or put option position which is covered by the sale or purchase
of the underlying futures contract or physical commodity.
Cross-Hedge Hedging a cash
market position in a futures contract for a different, but
price-related commodity.
Customer Segregated Funds See
Segregated Account.
Day Order An order that if
not executed expires automatically at the end of the trading
session on the day it was entered.
Day Trader A speculator who
will normally initiate and offset a position within a single
trading session.
Default The failure to
perform on a futures contract as required by exchange rules, such
as a failure to meet a margin call or to make or take delivery.
Deferred Delivery The
distant delivery months in which futures trading is taking place,
as distinguished from the nearby futures delivery month.
Delivery The tender and
receipt of an actual commodity or warehouse receipt or other
negotiable instrument covering such commodity, in settlement of a
futures contract.
Delta Value The expected
change in an option's price given a one-unit change in the price
of the underlying futures contract.
Derivative A financial
instrument, traded on or off the exchange, the price of which is
directly dependent upon the value of one or more underlying
securities, equity indices, debt instruments, or any agreed upon
pricing index or arrangement.
Designated Self-Regulatory
Organization (DSRO) When a Futures Commission Merchant (FCM)
is a member of more than one Self-Regulatory Organization (SRO),
the SROs may decide among themselves which of them will be
primarily responsible for enforcing minimum financial and sales
practice requirements. With approval, the SRO will be appointed
DSRO for that particular FCM. See also Self-Regulatory
Organization.
Disclosure Document The
document that must be provided to and signed by prospective
customers that describes fees, performance, etc.
Discount (1) The amount a
price would be reduced to purchase a commodity of lesser grade;
(2) sometimes used to refer to the price differences between
futures of different delivery months, as in the phrase "July
is trading at a discount to May," indicating that the price
of the July futures contract is lower than that of May; (3)
applied to cash grain prices that are below the futures price.
See also Option Premium.
Discretionary Account An
arrangement by which the owner gives written power of attorney to
someone else, usually the broker or a Commodity Trading Advisor,
to buy and sell without prior approval of the account owner.
Often referred to as a Managed Account.
Dual Trading Dual trading
occurs when (1) a floor broker executes customer orders and, on
the same day, trades for his own account or an account in which
he has an interest; or (2) a Futures Commission Merchant carries
customer accounts and also trades, or permits its employee to
trade, in accounts in which it has a proprietary interest, also
on the same day.
Elasticity A characteristic
of commodities which describes the commodity. A commodity is said
to be elastic in demand when a price change creates an increase
or decrease in consumption; the supply of a commodity is said to
be elastic when a change in price creates change in the
production of the commodity.
Electronic Trading Systems
Systems that allow participating exchanges to list their products
for trading after the close of the exchange's open outcry trading
hours (i.e., Chicago Board of Trade's Project A, Chicago
Mercantile Exchange's GLOBEX and New York Mercantile Exchange's
ACCESS).
Equity The dollar value of
a futures trading account if all open positions were offset at
the going market price.
Exchange See Contract
Market.
Exchange for Physicals A
transaction generally used by two hedgers who want to exchange
futures for cash positions. Also referred to as against
actuals or versus cash.
Exercise Exercising a call
means that you elect to purchase the underlying futures contract
at the option strike price. Exercising a put means that you elect
to sell the underlying futures contract at the option strike
price.
Exercise Price See Strike
Price.
Expiration Date Generally
the last date on which an option may be exercised. It is not
uncommon for an option to expire on a specified date during the
month prior to the delivery month for the underlying futures
contracts.
Extrinsic Value See Time
Value.
First Notice Day The first
day on which notice of intent to deliver a commodity in
fulfillment of an expiring futures contract can be given to the
clearing house by a seller and assigned by the clearing house to
a buyer. Varies from contract to contract.
Floor Broker An individual
who executes orders on the trading floor of an exchange for any
other person.
Floor Trader Members of an
exchange who are personally present, on the trading floors of the
exchanges, to make trades for themselves. Sometimes called Locals.
Forward (Cash) Contract A
contract on which a seller agrees to deliver a specified cash
commodity to a buyer sometime in the future. In contrast to
futures contracts, the terms of forward contracts are not
standardized. Forward contracts are not traded on federally
designated exchanges.
Frontrunning A process
whereby a futures or options position is taken based on
non-public information about an impending transaction in the same
or a related futures or options contract.
Fully Disclosed An account
carried by a Futures Commission Merchant in the name of the
individual customer; the opposite of an Omnibus Account.
Fundamental Analysis The
study of basic, underlying factors which will affect the supply
and demand and hence the price of a futures contract.
Futures Commission Merchant
(FCM) An individual or organization which solicits or accepts
orders to buy or sell futures or options contracts and accepts
money or other assets from customers in connection with such
orders. Must be registered with the Commodity Futures Trading
Commission.
Futures Contract A legally
binding agreement to buy or sell a commodity or financial
instrument at a later date. Futures contracts are standardized
according to the quality, quantity, and delivery time and
location for each commodity.
Futures Industry Association
(FIA) The national trade association for Futures Commission
Merchants.
In-the-Money An option
having intrinsic value. A call is in-the-money if its strike
price is below the current price of the underlying futures
contract. A put is in-the-money if its strike price is above the
current price of the underlying futures contract.
Inelasticity A
characteristic that describes the interdependence of the supply,
demand, and price of a commodity. A commodity is inelastic when a
price change does not create an increase or decrease in
consumption; inelasticity exists when supply and demand are
relatively unresponsive to changes in price.
Initial Margin The amount a
futures market participant must deposit into a margin account at
the time an order is placed to buy or sell a futures contract.
Margin in futures is not a down payment as it is in securities,
but rather a performance bond. See also Margin.
Intrinsic Value The
absolute value of the in-the-money amount; that is, the amount
that would be realized if an in-the-money option were exercised.
Introducing Broker (IB) A
firm or individual that solicits and accepts futures orders from
customers but does not accept money, securities, or
property from the customer. An IB must be registered with the
Commodity Futures Trading Commission and must carry all of its
accounts through a Futures Commission Merchant on a fully
disclosed basis.
Last Trading Day
The last
day on which trading may occur in a given futures or options
contract.
Leverage The ability to
control large dollar amounts of a commodity with a comparatively
small amount of capital.
Limit See Position
Limit, Price Limit, Variable Limit.
Limit Move A price that has
advanced or declined the limit permitted during one trading
session as fixed by the rules of a contract market.
Liquidate To sell (or
purchase) futures contracts of the same delivery month purchased
(or sold)during an earlier transaction or make (or take) delivery
of the cash commodity represented by the futures market.
Liquidity (Liquid Market) A
broadly traded market where buying and selling can be
accomplished with small price changes and bid and offer price
spreads are narrow.
Local A member of an
exchange who trades for his own account or fills orders for
customers.
Long One who has bought
futures contracts or owns a cash commodity.
Long Hedge Buying futures
contracts to protect against possible increasing prices of
commodities. See also Hedging.
Maintenance Margin
A set
minimum margin (per outstanding futures contract) that a customer
must maintain. See also Margin.
Managed Account See Discretionary
Account.
Managed Futures Association
(MFA) The trade association for the managed futures industry.
Margin An amount of money
deposited by both buyers and sellers of futures contracts and by
sellers of option contracts to ensure performance of the terms of
the contract (the making of taking delivery of the commodity or
the cancellation of the position by a subsequent offsetting
trade). Margin in futures is not a down payment, as in
securities, but rather a performance.
Margin Call A call from a clearing
house to a clearing member, or from a broker or firm to a customer, to bring
margin deposits up to a required minimum level.
Mark-to-Market To debit or credit on
a daily basis a margin account based on the close of that day's trading session.
Market Order An order to buy or sell
a futures or options contract at whatever price is obtainable when the order
reaches the trading floor.
Maximum Price Fluctuation See Limit
Move.
Minimum Price Fluctuation See Tick.
Naked Option See
Uncovered
Option.
National Futures Association (NFA) Authorized
by Congress in 1974 and designated by the CFTC in 1982 as a "registered
futures association", NFA is the industrywide self-regulatory organization
of the futures industry.
National Introducing Brokers Association (NIBA) NIBA
is a non-profit organization for guaranteed and independent introducing brokers.
Nearby Delivery Month The futures
contract month closest to expiration.
Net Asset Value The value of each
unit of participation in a commodity pool. Basically a calculation of assets
minus liabilities plus or minus the value of open positions when marked to the
market, divided by the number of units.
Net Performance An increase or
decrease in net asset value exclusive of additions, withdrawals, and
redemptions.
Notice Day Any day on which notices
of intent to deliver on futures contracts may be issued.
Offer An indication of willingness
to sell a futures contract at a given price; the opposite of Bid.
Offset To take a second futures or
options position opposite to the initial or opening position. See also Liquidate.
Omnibus Account An account carried
by one Futures Commission Merchant (FCM) with another FCM in which the
transactions of two or more persons are combined and carried in the name of the
originating FCM rather than of the individual customer; the opposite of Fully
Disclosed.
Open (the) The period at the
beginning of the trading session officially designated by the exchange during
which all transactions are considered made "at the open".
Open Interest The sum of all long or
short futures contracts in one delivery month or one market that have been
entered into and not yet liquidated by an offsetting transaction or fulfilled by
delivery.
Open Outcry A method of public
auction for making bids and offers in the trading pits of futures exchanges.
Open Trade Equity The unrealized
gain or loss on open positions.
Opening Range The range of prices at
which buy and sell transactions took place during the opening of the market.
Option Contract A contract which
gives the buyer the right, but not the obligation, to buy or sell a specified
quantity of a commodity at a specific price within a specified period of time.
The seller of the option has the obligation to sell the commodity or futures
contract or buy it from the option buyer at the exercise price if the option is
exercised. See also Call Option and Put Option.
Option Premium The price a buyer
pays for an option. Premiums are arrived at through open competition between
buyers and sellers on the trading floor of the exchange.
Option Seller See
Grantor.
Orders See
Market
Order, Stop Order.
Original Margin See
Initial
Margin.
Out-of-the-Money A call option with
a strike price higher or a put option with a strike price lower than the current
market value of the underlying asset.
Out Trade A trade which cannot be
cleared by a clearing house because the data submitted by the two clearing
members involved in the trade differs n some respect.
Over-the-Counter Market A market
where products such as stocks, foreign currencies and other cash items are
bought and sold by telephone and other electronic means of communication.
Overbought A technical opinion that
the market price has risen too steeply and too fast in relation to underlying
fundamental factors.
Oversold A technical opinion that
the market price has declined too steeply and too fast in relation to underlying
fundamental factors.
Par The face value of a security.
Pit The area on the trading floor of
some exchanges where trading in futures or options contracts is conducted by
open outcry.
Pool See
Commodity Pool.
Position A commitment, either long
or short, in the market.
Position Limit The maximum number of
speculative futures contracts one can hold as determined by the Commodity
Futures Trading Commission and/or the exchange where the contract is traded.
Position A commitment, either long
or short, in the market.
Position Limit The maximum number of
speculative futures contracts one can hold as determined by the Commodity
Futures Trading Commission and/or the exchange where the contract is traded.
Position Trader A trader who either
buys or sells contracts and holds them for an extended period of time, as
distinguished from the day trader.
Prearranged Trading Trading between
brokers in accordance with a expressed or implied agreement or understanding,
which is a violation of the Commodity Exchange Act.
Premium Refers to (1) the amount a
price would be increased to purchase a better quality commodity; or (2) a future
delivery month selling at a higher price than another; or (3) cash prices that
are above the futures price.
Price Discovery The process of
determining the price level of a commodity based on supply and demand factors.
Price Limit The maximum advance or
decline from the previous day's settlement price permitted for a futures
contract in one trading session.
Principal Refers to (1) a sole
proprietor, general partner, officer or director, or person occupying a similar
status or performing similar functions, having the power to exercise a
controlling influence over the activities of the entity; or (2) any holder or
any beneficial owner of 10 percent or more of the outstanding shares of any
class of stock of the entity; or (3) any person who has contributed 10 percent
or more of the capital of the entity.
Purchase and Sale Statement (P & S) A
statement sent by a Futures Commission Merchant to a customer when a futures or
options position has been liquidated or offset. The statement shows the number
of contracts bought or sold, the prices at which the contracts were bought or
sold, the gross profit or loss, the commission charges and the net profit or
loss on the transaction. Sometimes combined with a Confirmation
Statement.
Put Option An option that gives the
option buyer the right but not the obligation to sell the underlying futures
contract at a particular price on or before a particular date.
Pyramiding The use of unrealized
profits on existing futures positions as margin to increase the size of the
position, normally in successively smaller increments.
Range The difference between the
high and low price of a commodity during a given trading session, week, month,
year, etc.
Regulations (CFTC) The regulations
adopted and enforced by the Commodity Futures Trading Commission in order to
administer the Commodity Exchange Act.
Reparations Compensation payable to
a wronged party in a futures or options transaction. The term is used in
conjunction with the Commodity Futures Trading Commission's customer claims
procedure to recover civil damages.
Reportable Positions The number of
open contracts specified by the Commodity Futures Trading Commission (CFTC) at
which one must begin reporting total positions by delivery month to the
authorized exchange and/or the CFTC.
Round Turn A completed futures
transaction involving both a purchase and a liquidating sale, or sale followed
by a covering purchase.
Rules (NFA) The standards and
requirements to which participants who are required to be Members of National
Futures Association must subscribe and conform.
Scalper A trader who trades for
small, short-term profits during the course of a trading session, rarely
carrying a position overnight.
Segregated Account A special account
used to hold and separate customers' assets from those of the broker or firm.
Self-Regulatory Organization (SRO) Self-regulatory
organizations (i.e. the futures exchanges and National Futures Association)
enforce minimum financial and sales practice requirements for their members. See
also Designated Self- Regulatory Organization.
Selling Hedge See
Short
Hedge.
Settlement Price The daily price at
which the clearing house settles all accounts between clearing members for each
contract month. Settlement prices are used to determine both margin calls and
invoice prices for deliveries. The term also refers to a price established by
the clearing organization to calculate account values and determine margins for
those positions still held and not yet liquidated.
Short One who has sold futures
contracts or the cash commodity.
Short Hedge Selling futures
contracts to protect against possible declining prices of commodities. See also Hedging.
Speculator One who tries to profit
from buying and selling futures and options contracts by anticipating future
price movements.
Spot Usually refers to a cash market
price for a physical commodity that is available for immediate delivery.
Spreading The simultaneous buying
and selling of two related markets in the expectation that a profit will be made
when the position is offset.
Stop Order An order that becomes a
market order when the futures contract reaches a particular price level. A sell
stop is placed below the market, a buy stop is placed above the market.
Strike Price The price at which the
buyer of a call (put) option may choose to exercise his right to purchase (sell)
the underlying futures contract. Also called Exercise
Price.
Swap In general, the exchange of one
asset or liability for a similar asset or liability for the purpose of
lengthening or shortening maturities, or raising or lowering coupon rates, to
maximize revenue or minimize financing costs.