General Theory - General Futures Terminology
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.
Investing BasicsFind out which futures, options or funds will be your perfect commodity portfolio fit.
Options & FuturesWhat Is It? As the name implies, futures are contracts on commodities, currencies, and stock market indexes that attempt to predict the value of these securities at some date in the future. ...
InsuranceBuying and selling in the futures market can seem risky and complicated. As we've already said, futures trading is not for everyone, but it works for a wide range of people. This tutorial has ...
InsuranceA futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery ...
Active TradingDiscover why controlled chaos can mean an exciting investment experience for you.
Investing BasicsContango is when the futures price of a commodity is higher than the expected future spot price.
Options & FuturesOptions on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
Forex StrategiesWe explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
Mutual Funds & ETFsThese funds make investing in gold, oil or grain an easier prospect.
Investing BasicsWhen will it be safe to buy commodities (and which ones)? A closer look at the commodities markets and how they move.
A contractual agreement, generally made on the trading floor ...
A brokerage or merchant firm which buys and sells futures contracts ...
A commodity traded on the spot market. That is, with the expectation ...
The day after which an investor who has purchased a futures contract ...
An independent U.S. federal agency established by the Commodity ...
A financial contract obligating the buyer to purchase an asset ...
Learn what items futures may be purchased for, what a futures contract is and discover how the futures markets have greatly ... Read Answer >>
Learn what resources are available to learn about trading commodities, and understand some of the differences between stocks ... Read Answer >>
Explore the wide variety of available futures contracts traded on exchanges, which range from agricultural commodities to ... Read Answer >>
The correct answer is a) Long the commodity and short the futures Read Answer >>
Managed futures are futures positions entered into by professional money managers, known as commodity trading advisors, on ... Read Answer >>
Find out more about commodity spot and futures prices, how to calculate commodity futures prices and how spot prices indicate ... Read Answer >>