What Is a Job Lot?
In finance, the term “job lot” refers to a commodities futures contract whose denomination is smaller than the typical standard lot for that commodity. For example, the standard lot for a crude oil futures contract is 1,000 barrels per contract. Any crude oil futures contract corresponding to less than 1,000 barrels would therefore be considered a job lot.
The term job lot is also used in the manufacturing sector, to refer to custom jobs whose parameters fall outside of the normal production process.
- A job lot is a futures contract whose denomination is less than a standard lot.
- It can also refer to a non-standard job undertaken by a manufacturer.
- In the commodities futures market, job lets help smaller buyers participate in the market, increasing liquidity for all market participants.
How Job Lots Work
Today’s commodity futures exchanges are a large and important part of the global financial markets. Through them, producers can access the vital commodities they need, while financial buyers can speculate on commodity prices and control risks through hedging activities. One of the key components of this system is the fact that commodity exchanges use standard contracts. This greatly simplifies the trading system and allows transactions to take place in large volumes and at high speeds.
Oftentimes, however, the standard contract sizes for commodity futures could be prohibitively large for smaller companies and investors. For instance, the Chicago Mercantile Exchange (CME)’s futures contract for soybeans corresponds to roughly 136 metric tons of soybeans per contract. A relatively small buyer who intends to take physical delivery upon expiration of the contract might not need that quantity of supply. Similarly, a speculator with relatively limited capital to invest might be reluctant to speculate on soybean futures if they risk being forced to potentially take delivery of such a large volume of soybeans.
To help accommodate these smaller market participants, commodities exchanges sometimes permit smaller order sizes. These ‘job lot’ futures contracts permit smaller denominations, such as 100 barrels of oil as compared to the standard 1,000. By allowing smaller investors to participate in the futures market, job lots help increase the total liquidity of the marketplace, making it easier for all traders to benefit from fast transaction times and relatively efficient prices.
Real World Example of a Job Lot
Futures contracts are typically standardized and trade on a futures exchange. A futures contract is considered a job lot when the agreement between the buyer and seller for the delivery of a commodity has a quantity below the normal limits for a commodity futures contract.
For example, precious metals—such as gold and silver—are often bought and sold as commodities futures contracts. A commodities exchange might issue silver futures contracts denominated in 5-ounce increments. If the exchange agreed to enter into a commodity futures contract with a buyer below the 5-ounce minimum, it would be considered a job lot.