What is a Spot Market
The spot market is where financial instruments, such as commodities and securities, are traded for immediate delivery. Delivery is the exchange of cash for the financial instrument. In spot markets, spot trades are made with spot prices. This varies from a futures market, since a futures contract is a based on delivery of the underlying asset at a future date. Organized exchanges and over-the-counter (OTC) markets may provide spot trading or futures trading.
Breaking Down the Spot Market
Spot markets are also referred to as “physical markets” or “cash markets” because trades in these markets mean the cash is being swapped for the asset effectively immediately. While the official transfer of funds between the buyer and sell may take time, such as T+2 in the stock market, in a spot transaction both parties are agreeing to the trade right now. A non-spot, or future transaction, is agreeing to a price now, but delivery and transfer of funds will take place at a later date.
Futures trades in contracts that are about to expire are also sometimes called spot trades, since the expiring contract means that the buyer and seller will be exchanging cash for the underlying asset immediately.
The current price of a financial instrument is called the spot price. It is the price at which an instrument can be sold or bought at a particular time and at a specified place (like an exchange). Buyers and sellers create the spot price by posting their buy and sell orders. In liquid markets, the spot price may change by the second, as orders are filled and new ones come into the marketplace.
Organized Markets or Exchanges
Exchanges are organized markets that bring together dealers and traders who buy and sell commodities, securities, currencies, futures, options, and other financial instruments. Based on all the orders provided by participants, the exchange provides the current price and volume available to traders with access to the exchange.
The New York Stock Exchange is an example of an exchange where traders buy and sell stocks. This is a spot market.
The Chicago Mercantile Exchange is an example of an exchange where traders buy and sell futures contracts. This is a futures market exchange.
Trades that occur directly between a buyer and seller are called over-the-counter (OTC). These trades are not facilitated by a major exchange.
In an OTC transaction, the price may be based on spot, or a future price/date. In an OTC transaction the terms are not necessarily standardized, and therefore, may be subject to the discretion of the buyer and/or seller. As with exchanges, OTC stock transactions are typically spot trades, while futures or forward transactions are often not spot.