General Futures Terminology
This section introduces the candidate to common futures vocabulary. For these definitions, the author relied on the online glossary provided by the futures exchanges' regulator, the Commodity Futures Trading Commission (CFTC).
These terms below are by no means the only ones you need to know, but they are the ones specified by the National Futures Association's (NFA's) study outline, so you can expect a couple vocabulary questions about them on the Series 3 exam.
Definitions here are for reference. These concepts will be explored in more depth in later chapters.
A few terms specified by the NFA, but that were already defined in this chapter, are omitted here.
Associated Person (AP): An individual who solicits or accepts (other than in a clerical capacity) orders, discretionary accounts, or participation in a commodity pool, or supervises any individual so engaged on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Advisor or a Commodity Pool Operator.
Commodity Pool Operator (CPO): A person engaged in a business similar to an investment trust or a syndicate who solicits or accepts funds for the purpose of trading commodity futures contracts.
Commodity Trading Advisor (CTA): A person who, for compensation, regularly engages in the business of advising others as to the value of commodity futures or the advisability of trading in commodity futures, or issues analyses or reports concerning commodity futures.
Floor Broker (also known as a commission house broker): A person with exchange trading privileges who, in any place provided by an exchange for the meeting of persons similarly engaged, executes for another person any orders for the purchase or sale of any commodity for future delivery.
Floor Trader: A person with exchange trading privileges who executes his own trades by being personally present in the pit or ring for futures trading.
Futures Commission Merchant (FCM): A person or firm that solicits or accepts orders for the purchase or sale of any commodity for future delivery, on or subject to the rules of any exchange, and that accepts payment from or extends credit to those whose orders are accepted.
Introducing Broker (IB): A person who solicits or accepts orders for the purchase or sale of futures contracts, but doesn't accept collateral against any resulting trades or contracts.
Position Trader: A commodity trader who either buys or sells contracts and holds them for an extended period of time, as distinguished from a day trader, who will normally initiate and offset a futures position within a single trading session.
Scalper: A speculator on the trading floor of an exchange who buys and sells rapidly, with small profits or losses, holding his positions for only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above, e.g., to buy at the bid and sell at the offer or ask price, with the intent of capturing the spread between the two, thus creating market liquidity.
Process, Pricing and Regulation
Basis: The difference between the spot price of a commodity and the price of the nearest futures contract for the same commodity. Cash-futures = basis.
Bucketing: Taking the opposite side of a customer's order into a broker's own account, or into an account in which a broker has an interest, without open and competitive execution of the order on an exchange. A violation, bucketing entails holding customer orders without immediately executing them.
Churning: Excessive trading of a discretionary account for the purpose of generating commissions, while disregarding the financial objectives of the customer.
Convergence: The tendency for prices of physicals and futures to approach one another, usually during the delivery month.
Deferred Months: All futures delivery months beyond the next one.
Ex-pit Transactions: Entries made upon the books of Futures Commission Merchants for the purpose of:
1. transferring existing trades from one account to another within the same firm where no change in ownership is involved;
2. transferring existing trades from the books of one FCM to the books of another FCM where no change in ownership is involved.
First Notice Day: The first day on which notices of intent to deliver actual commodities against futures market positions can be received.
Limit (Up or Down): The maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange.
Locked Limit: A price that has advanced or declined the permissible limit during one trading session.
Pit: A specially constructed area on the trading floor where trading in a futures contract or option is conducted; called a ring on some exchanges.
Retender: The return of a future contract's notice to the clearinghouse in advance of its reissue.
Variation call: Margin call payment made on a daily or intraday basis by a clearing member to the clearinghouse, based on adverse price movement in positions carried by the clearing member.
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