Difference between commodity broker and trader
An arrangement by which the owner of the account gives written power of attorney to someone else, usually the broker or a Commodity Trading Advisor, to buy and sell without prior approval of the account owner. Also referred to as a Managed Account.
An order placed electronically without the use of a broker either via the Internet or an electronic trading system. Systems that allow participating exchanges to list their products for trading electronically. These systems may replace, supplement or run along side of the open outcry trading. The action taken by the holder of a call option if he wishes to purchase the underlying futures contract or by the holder of a put option if he wishes to sell the underlying futures contract.
Generally the last date on which an option may be exercised. It is not uncommon for an option to expire on a specified date during the month prior to the delivery month for the underlying futures contracts. The first day on which notice of intent to deliver a commodity in fulfillment of an expiring futures contract can be given to the clearinghouse by a seller and assigned by the clearinghouse to a buyer.
Varies from contract to contract. An individual who executes orders on the trading floor of an exchange for any other person. An individual who is a member of an exchange and trades for his own account on the floor of the exchange. A contract which requires a seller to agree to deliver a specified cash commodity to a buyer sometime in the future, where the parties expect delivery to occur.
All terms of the contract may be customized, in contrast to futures contracts whose terms are standardized. An account carried by a Futures Commission Merchant in the name of an individual customer; the opposite of an Omnibus Account. A method of anticipating future price movement using supply and demand information. An individual or organization which solicits or accepts orders to buy or sell futures contracts or commodity options and accepts money or other assets from customers in connection with such orders.
A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are normally standardized according to the quality, quantity, delivery time and location for each commodity, with price as the only variable. An international electronic trading system for futures and options that allows participating exchanges to list their products for trading after the close of the exchanges' open outcry trading hours.
A Guaranteed Introducing Broker is an IB that has a written agreement with a Futures Commission Merchant that obligates the FCM to assume financial and disciplinary responsibility for the performance of the Guaranteed Introducing Broker in connection with futures and options customers.
A Guaranteed Introducing Broker is not subject to minimum financial requirements. The practice of offsetting the price risk inherent in any cash market position by taking an opposite position in the futures market. A long hedge involves buying futures contracts to protect against possible increasing prices of commodities. A short hedge involves selling futures contracts to protect against possible declining prices of commodities. The highest price of the day for a particular futures or options on futures contract.
An option that has intrinsic value. A call option is in-the-money if its strike price is below the current price of the underlying futures contract. A put option is in-the-money if its strike price is above the current price of the underlying futures contract.
The amount a futures market participant must deposit into a margin account at the time an order is placed to buy or sell a futures contract. A firm or individual that solicits and accepts commodity futures orders from customers but does not accept money, securities or property from the customer. The last day on which trading may occur in a given futures or option. The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.
To sell a previously purchased futures or options contract or to buy back a previously sold futures or options position. Also referred to as Offset. A characteristic of a security or commodity market with enough units outstanding and enough buyers and sellers to allow large transactions without a substantial change in price.
One who has bought futures contracts or options on futures contracts or owns a cash commodity. The lowest price of the day for a particular futures or options on futures contract. A set minimum amount per outstanding futures contract that a customer must maintain in his margin account to retain the futures position.
An amount of money deposited by both buyers and sellers of futures contracts and by sellers of options contracts to ensure performance of the terms of the contract the making or taking delivery of the commodity or the cancellation of the position by a subsequent offsetting trade.
Margin in commodities is not a down payment, as in securities, but rather a performance bond. A call from a clearinghouse to a clearing member, or from a broker or firm to a customer, to bring margin deposits up to a required minimum level. In this way, buyers and sellers are protected against the possibility of contract default.
An order to buy or sell a futures or options contract at whatever price is obtainable when the order reaches the trading floor. The futures contract month closest to expiration. Also referred to as the Spot Month. The value of each unit of participation in a commodity pool. Basically a calculation of assets minus liabilities plus or minus the value of open positions when marked to the market, divided by the total number of outstanding units.
An increase or decrease in net asset value exclusive of additions, withdrawals and redemptions. An indication of willingness to sell a futures contract at a given price; the opposite of Bid. An account carried by one Futures Commission Merchant FCM with another FCM in which the transactions of two or more persons are combined and carried in the name of the originating FCM rather than of the individual customers; the opposite of Fully Disclosed.
The total number of futures or options contracts of a given commodity that have not yet been offset by an opposite futures or option transaction nor fulfilled by delivery of the commodity or option exercise. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted. A method of public auction for making bids and offers in the trading pits of futures exchanges. The range of prices at which buy and sell transactions took place during the opening of the market.
The purchaser of either a call or put option. Option buyers receive the right, but not the obligation, to assume a futures position. Also referred to as a Holder. A contract which gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or a futures contract at a specific price within a specified period of time.
The seller of the option has the obligation to sell the commodity or futures contract or to buy it from the option buyer at the exercise price if the option is exercised. See also Call Option and Put Option. The price a buyer pays and a seller receives for an option. Premiums are arrived at through the market process. There are two components in determining this price—extrinsic or time value and intrinsic value. A call option with a strike price higher or a put option with a strike price lower than the current market value of the underlying asset i.
A market where products such as stocks, foreign currencies and other cash items are bought and sold by telephone, Internet and other electronic means of communication rather than on a designated futures exchange. The area on the trading floor where trading in futures or options contracts is conducted by open outcry. Also referred to as a ring. See also Price Limit, Variation Limit. A trader who either buys or sells contracts and holds them for an extended period of time, as distinguished from a day trader.
Refers to 1 the price paid by the buyer of an option; 2 the price received by the seller of an option; 3 cash prices that are above the futures price; 4 the amount a price would be increased to purchase a better quality commodity; or 5 a futures delivery month selling at a higher price than another. The determination of the price of a commodity by the market process.
The maximum advance or decline, from the previous day's settlement price, permitted for a futures contract in one trading session. Also referred to as Maximum Price Fluctuation. See also Position Limit, Variation Limit. A statement sent by a Futures Commission Merchant to a customer when a futures or options position has been liquidated or offset. The statement shows the number of contracts bought or sold, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges and the net profit or loss on the transaction.
Sometimes combined with a Confirmation Statement. An option which gives the buyer the right, but not the obligation, to sell the underlying futures contract at a particular price strike or exercise price on or before a particular date. The actual price or the bid or ask price of either cash commodities or futures or options contracts at a particular time.
The difference between the high and low price of a commodity during a given trading session,week, month, year, etc. A completed futures transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase. The standards and requirements to which participants who are required to be Members of National Futures Association must subscribe and conform.
A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight. Also referred to as Customer Segregated Funds. See also Designated Self-Regulatory Organization. The last price paid for a futures contract on any trading day.
Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries. Also referred to as Closing Price. One who has sold futures contracts or plans to purchase a cash commodity. A market participant who tries to profit from buying and selling futures and options contracts by anticipating future price movements.
Speculators assume market price risk and add liquidity and capital to the futures markets. Usually refers to a cash market for a physical commodity where the parties generally expect immediate delivery of the actual commodity.
The buying and selling of two different delivery months or related commodities in the expectation that a profit will be made when the position is offset. An order that becomes a market order when the futures contract reaches a particular price level. A sell stop is placed below the market, a buy stop is placed above the market.
The price at which the buyer of a call put option may choose to exercise his right to purchase sell the underlying futures contract. Also called Exercise Price. An approach to analysis of futures markets which examines patterns of price change, rates of change, and changes in volume of trading, open interest and other statistical indicators.
The smallest increment of price movement for a futures contract. Also referred to as Minimum Price Fluctuation. The amount of money options buyers are willing to pay for an option in anticipation that over time a change in the underlying futures price will cause the option to increase in value. In general, an option premium is the sum of time value and intrinsic value.
Any amount by which an option premium exceeds the option's intrinsic value can be considered time value. Also referred to as Extrinsic Value. A short call or put option position which is not covered by the purchase or sale of the underlying futures contract or physical commodity. Also referred to as a Naked Option. The specific futures contract that the option conveys the right to buy in case of a call or sell in the case of a put.
A price system that allows for larger than normal allowable price movements under certain conditions. In periods of extreme volatility, some exchanges permit trading at price levels that exceed regular daily price limits. See also Position Limit, Price Limit. Additional margin required to be deposited by a clearing member firm to the clearinghouse during periods of great market volatility or in the case of high-risk accounts.
The number of purchases and sales of futures contracts made during a specified period of time, often the total transactions for one trading day.
A person who sells an option and assumes the potential obligation to sell in the case of a call or buy in the case of a put the underlying futures contract at the exercise price. Also referred to as an Option Grantor. A graphic representation of market yield for a fixed income security plotted against the maturity of the security.
Past performance is not necessarily indicative of future results and the risk of loss does exist in futures trading. All trading rates quoted per side. Applicable exchange, regulatory, and brokerage fees apply to rates shown. Please email webmaster unitedfutures.
Open An Account Now Online! Commodity Futures Trading Glossary of Terms. List of commodity futures related terms used within the industry: Abandon The act of an option holder in electing not to exercise or offset an option. Actuals See Cash Commodity.
Aggregation The policy under which all futures positions owned or controlled by one trader or a group of traders are combined to determine reportable positions and speculative limits. Approved Delivery Facility Any bank, stockyard, mill, storehouse, plant, elevator or other depository that is authorized by an exchange for the delivery of commodities tendered on futures contracts.
Arbitrage The simultaneous purchase and sale of similar commodities in different markets to take advantage of a price discrepancy. Arbitration The process of resolving disputes between parties by a person or persons arbitrators chosen or agreed to by them.
At-the-Money Option An option whose strike price is equal—or approximately equal—to the current market price of the underlying futures contract. Bid An expression of willingness to buy a commodity at a given price; the opposite of Offer. Board of Trade See Contract Market. Carrying Broker A member of a futures exchange, usually a clearinghouse member, through which another firm, broker or customer chooses to clear all or some trades.
Cash Commodity The actual physical commodity as distinguished from the futures contract based on the physical commodity. Cash Market A place where people buy and sell the actual commodities i. Cash Settlement A method of settling certain futures or options contracts whereby the market participants settle in cash payment of money rather than delivery of the commodity.
Certificated or Certified Stocks Stocks of a commodity that have been inspected and found to be of a quality deliverable against futures contracts, stored at the delivery points designated as regular or acceptable for delivery by a commodity exchange.
Churning Excessive trading that results in the broker deriving a profit from commissions while disregarding the best interests of the customers. Circuit Breaker A system of trading halts and price limits on equities and derivatives markets designed to provide a cooling-off period during large, intraday market declines or rises.
Clear The process by which a clearinghouse maintains records of all trades and settles margin flow on a daily mark-to-market basis for its clearing members. Clearinghouse A corporation or separate division of a futures exchange that is responsible for settling trading accounts, collecting and maintaining margin monies, regulating delivery and reporting trade data.
Clearing Member A member of an exchange clearinghouse responsible for the financial commitments of its customers. Closing Price See Settlement Price. Closing Range A range of prices at which futures transactions took place during the close of the market.
Commission A fee charged by a broker to a customer for executing a transaction. Commodity Pool An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options contracts.
Commodity Trading Advisor CTA A person who, for compensation or profit, directly or indirectly advises others as to the advisability of buying or selling futures or commodity options. Confirmation Statement A statement sent by a Futures Commission Merchant to a customer when a futures or options position has been initiated.
Contract Market A board of trade designated by the CFTC to trade futures or options contracts on a particular commodity. Contract Month he month in which delivery is to be made in accordance with the terms of the futures contract. Convergence The tendency for prices of physical commodities and futures to approach one another, usually during the delivery month. Covered Option A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodity.
Cross-Hedging Hedging a cash commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged and the cash and futures market follow similar price trends e. Current Delivery Month The futures contract which matures and becomes deliverable during the present month. Commodity contracts include futures , options , and similar financial derivatives.
Clients who trade commodity contracts are either hedgers using the derivatives markets to manage risk, or speculators who are willing to assume that risk from hedgers in hopes of a profit. Ever since the s, the majority of commodity contracts traded are financial derivatives with financial underlying assets such as stock indexes and currencies.
When executing trades on behalf of a client in exchange for a commission he is acting in the role of a broker. When trading on behalf of his own account, or for the account of his employer, he is acting in the role of a trader. Floor trading is conducted in the pits of a commodity exchange via open outcry. A floor broker is different than a "floor trader" he or she also works on the floor of the exchange, makes trades as a principal for his or her own account.
IBs do not actually hold customer funds to margin. They advise commodity pools and offer managed futures accounts. CTAs exercise discretion over their clients' accounts, meaning that they have power of attorney to trade the clients account on his behalf according to the client's trading objectives.