What is a call rule?

By Chizoba Morah AAA
A:

A call rule is a rule used in the futures exchange market. It is a rule that requires the formal bidding amount of a cash commodity to be set at the end of each trading day. A cash commodity is the physical product that is being traded or is behind a futures contract. For example, if you buy a futures contract for corn, there is an actual load of corn somewhere that is going to be delivered when the contract is exercised.

The set bidding price is held until the beginning of the next day and anyone who wants to bid can only do so at that price. The reason the Commodity Futures Trading Commission (CFTC) established the call rule was to reduce the volatility and instability of overnight trading. The call rule ensures that the prices of commodities traded at the exchange begin everyday near the previous day's closing bid. Before the call rule was instituted, secret bids that favored a small number of traders took place overnight and those bids altered the opening prices the next day.

The Chicago Board of Trade adopted the call rule in 1906. Opponents of the rule believed it violated the Sherman Anti Trust Law, but the supreme court upheld the rule in a 1918 ruling.

For a primer on trading commodities, check out An Overview of Commodities Trading.


This question was answered by Chizoba Morah.

RELATED FAQS

  1. What's the best way to play backwardation in the futures market?

    Backwardation is a market condition in which a futures contract far from its delivery date is trading at a lower price than ...
  2. Is there ever a bad time to invest in gold?

    Gold has been a stellar performer so far in this millennium, having racked up 11 straight years of gains since 2000 and appreciating ...
  3. How can I invest in a foreign exchange market?

    The foreign exchange market, also called the currency market or forex (FX), is the world's largest financial market, accounting ...
  4. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ...
RELATED TERMS
  1. Christmas tree (oil and gas)

    A vertical assembly of mechanical elements used in oil exploration ...
  2. FPSO (Floating Production Storage and Offloading)

    Acronym for Floating Production Storage and Offloading. FPSO ...
  3. Day rate (oil drilling)

    In oil production, a day rate is the amount a drilling contractor ...
  4. Houseable

    A piece of art that is able to fit inside a regular-sized living ...
  5. Cash-And-Carry Trade

    A trading strategy in which an investor buys a long position ...
  6. ISDA Master Agreement

    A standard agreement used in over-the-counter derivatives transactions.
comments powered by Disqus
Related Articles
  1. Curious About Stock Index Futures? Read ...
    Options & Futures

    Curious About Stock Index Futures? Read ...

  2. Investing In Commodities Without the ...
    Mutual Funds & ETFs

    Investing In Commodities Without the ...

  3. Coffee: The Cost Of A Cup
    Investing Basics

    Coffee: The Cost Of A Cup

  4. When and Why Do Gold Prices Plummet? ...
    Investing Basics

    When and Why Do Gold Prices Plummet? ...

  5. Is Ukrainian Debt Worth a Look?
    Bonds & Fixed Income

    Is Ukrainian Debt Worth a Look?

Trading Center