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 kinds of financial instruments can I use a straddle for?

    Learn about options and straddles; discover some examples of optionable assets and how a straddle is used for financial instruments.
  2. What is the difference between extensive margin and intensive margin in economics?

    Find out why it is important for traders to understand the difference between initial margin requirements and maintenance ...
  3. What commodities are not tradable?

    Learn about some of the durable and consumable goods that are not considered tradable commodities and why these goods cannot ...
  4. What are the main benchmarks for tracking the performance of the metals and mining ...

    Discover how benchmarks are useful to investors and a variety of indexes and ETFs that can be used as benchmarks to track ...
RELATED TERMS
  1. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  2. Christmas tree (oil and gas)

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

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

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

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

    A trading strategy in which an investor buys a long position ...

You May Also Like

Related Articles
  1. Chart Advisor

    These Oil Service Stocks Are Ready For ...

  2. Options & Futures

    Examples Of Exchange-Traded Derivatives

  3. Options & Futures

    Advantages Of Trading Futures Over Stocks

  4. Chart Advisor

    Watch Out Below For Falling Lumber Prices

  5. Mutual Funds & ETFs

    What companies are positioned to grow ...

Trading Center