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.

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