Glossary
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D
Daily Price Limits: See Limit (Up or Down).
Day Order: An order that expires automatically at the end of each day's trading session. There may be a day order with time contingency. For example, an "off at a specific time" order is an order that remains in force until the specified time during the session is reached. At such time, the order is automatically canceled.
Day Traders: Traders, who take positions in the underlying and then offset them prior to the close of trading on the same trading day.
Day Trading: Establishing and offsetting the same market position within one day.
Dealer Option: A put or call on a physical commodity or security, not originating on or subject to the rules of an exchange, in which the obligation for performance rests with the writer of the option. Dealer options are normally written by firms handling the underlying commodity or security and offered to public customers, although the reverse may also be true.
Deck: The orders for purchase or sale of futures and option contracts held by a floor broker.
Declaration Date: See Expiration Date.
Declaration (of Options): See Exercise.
Default: Failure to perform on a futures contract as required by exchange rules, such as failure to meet a margin call, or to make or take delivery.
Deferred Futures: The futures contracts that expire during the most distant months. Also called Back Months. See Forward Purchase or Forward Sale.
Deliverable Grades: See Contract Grades.
Deliverable Stocks: Stocks of commodities located in exchange approved storage, for which receipts may be used in making delivery on futures contracts. In the cotton trade, the term refers to cotton certified for delivery. Also see Certificated Stocks.
Delivery: The tender and receipt of the actual, security, or the cash value of the underlying, or of a delivery instrument covering the underlying (e.g., warehouse receipts or shipping certificates), used to settle a futures contract. See Notice of Delivery.
Delivery, Current: Deliveries being made during a present month. Sometimes current delivery is used as a synonym for nearby delivery.
Delivery Date: The date on which the underlying or instrument of delivery must be delivered to fulfill the terms of a contract.
Delivery Instrument: A document used to effect delivery on a futures contract, such as a warehouse receipt or shipping certificate.
Delivery Month: The specified month within which a futures contract matures and can be settled by delivery.
Delivery, Nearby: The nearest traded month. In plural form, one of the nearer trading months.
Delivery Notice: The written notice given by the seller of his intention to make delivery against an open short futures position on a particular date. This notice, delivered through the clearing house, is separate and distinct from the warehouse receipt or other instrument that will be used to transfer title.
Delivery Option: A provision of a futures contract which provides the short with flexibility in regard to timing, location, quantity, or quality in the delivery process.
Delivery Points: Those locations designated by commodity exchanges where stocks of a commodity represented by a futures contract may be delivered in fulfillment of the contract.
Delivery Price: The price fixed by the clearing house at which deliveries on futures are invoiced--generally the price at which the futures contract is settled when deliveries are made.
Delta: The correlation factor between the fluctuation of the price of the underlying and the change in premium for the option on that underlying. Delta changes from moment to moment as the option premium changes. See Delta Value.
Delta Margining: An option margining system used by some exchanges for exchange members and/or floor traders which equates the changes in option premiums with the changes in the price of the underlying futures contract to determine risk factors on which to base the margin requirements.
Delta Value: The expected change in an option's price given a one-unit change in the price of the underlying futures contract, physical commodity, or equity shares.
Deposit: The initial outlay required by a broker of a client to open a futures position, returnable upon liquidation of that position.
Depository Receipt: See Vault Receipt.
Derivative: A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e., "derived from") the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). Derivatives involve the trading of rights or obligations based on the underlying product, but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for fixed rate of return.
Designated Self Regulatory Organization (DSRO): Self regulatory organizations (i.e., the commodity exchanges and the National Futures Association) must enforce minimum financial and reporting requirements for their members, among other responsibilities outlined in the CFTC's regulations. When a futures commission merchant (FCM) is a member of more than one SRO, the SROs may decide among themselves which of them will be responsible for assuming these regulatory duties and, upon approval of the plan by the Commission, be appointed the "designated self regulatory organization" for that FCM.
Diagonal Spread: A spread between two call options or two put options with different strike prices and different expiration dates.
Differentials: The discount (premium) allowed for grades or locations of a commodity lower (higher) than the par of basis grade or location specified in the futures contact. See Allowances.
Discount: (1) The amount a price would be reduced to purchase a commodity of lesser grade; (2) sometimes used to refer to the price differences between futures of different delivery months, as in the phrase "July at a discount to May," indicating that the price for the July futures is lower than that of May.
Discount Basis: Method of quoting securities where the price is expressed as a annualized discount from maturity value.
Discount Bond: A bond selling below par. See Par.
Discretionary Account: An arrangement by which the holder of an account gives written power of attorney to someone else, often a broker, to buy and sell without prior approval of the holder; often referred to as a "managed account" or "controlled account." See Controlled Account.
Distant or Deferred Delivery: Usually means one of the more distant months in which futures trading is taking place.
Dominant Future: That future having the largest number of open contracts.
Double Hedging: As used by the CFTC, it implies a situation where a trader holds a long position in the futures market in excess of the speculative limit as an offset to a fixed price sale even though the trader has an ample supply of the underlying on hand to fill all sales commitments.
DSRO: See Designated Self Regulatory Organization.
Dual Trading: Dual trading occurs when: (1) a floor broker executes customer orders and, on the same day, trades for his own account or an account in which he has an interest; or (2) an FCM carries customer accounts and also trades or permits its employees to trade in accounts in which it has a proprietary interest, also on the same trading day.
Duration: A measure of a bond's price sensitivity to changes in interest rates.
E
Ease Off: A minor and/or slow decline in the price of a market.
ECU: See European Currency Unit.
Efficient Market: A market in which new information is immediately available to all investors and potential investors. A market in which all information is instantaneously assimilated and therefore has no distortions.
EFP: Exchange for Physical. See Exchange of Futures for Cash.
Electronic Exchange (Electronic Trading Exchange): A trading exchange that exists entirely in cyberspace. There is no exchange trading floor and no open outcry. Trading is done via computer matching of orders, and the physical location of the exchange administration need not be in the same physical location as the computer that houses the exchange. An example would be the Hang-Seng Index, an index comprised of stocks on the Hong-Kong stock exchange. The exchange administration is located in Hong-Kong, but trading takes place on a computer located at the Matif Exchange in the nation of France.
Electronic Order Entry: Orders issued via an electronic device directly to a receiving device in an open outcry trading pit. Orders issued via an electronic device and received on an all electronic trading platform where the orders are matched for execution.
Electronic Order Routing: Orders issued via an electronic device directly to a receiving device in an open outcry trading pit, or to a receiving device on a trading floor, and then carried into the trading pit by a runner, or arbed into the trading pit via hand signal.
Electronic Trading: Trading done on a fully electronic trading exchange.
Elliot Wave: (1) A theory named after Ralph Elliot, who contended that the stock market tends to move in discernible and predictable patterns reflecting the basic harmony of nature; (2) in technical analysis, a charting method based on the belief that all prices act as wavers, rising and falling rhythmically.
Equity: The residual dollar value of a futures, option, or leverage trading account, assuming it was liquidated at current prices.
Euro: The official currency of the European Economic Community. It’s symbol is €.
Eurocurrency: Certificates of Deposit (CDS), bonds, deposits, or any capital market instrument issued outside of the national boundaries of the currency in which the instrument is denominated (for example, Euro-Swiss francs, Euro-Deutsche marks, eurodollars, eurodollar bonds, or eurodollar CDS).
Eurodollar or Eurodollar Time Deposits: U.S. dollar deposits placed with banks outside the U.S., either a foreign bank or the subsidiary of a U.S. bank. Holders may include individuals, companies, banks and central banks. The interest paid for these dollar deposits generally is higher than that for funds deposited in U.S. banks situated in the U.S. because foreign banks are considered to be more risky, i.e. they will not be supported or nationalized by the U.S. government upon default.
Eurodollar Bonds: Bonds issued in Europe by corporate or government interests outside the boundary of the national capital market, denominated in dollars.
Eurodollar CDS: Dollar-denominated certificates of deposit issued by a bank outside of the United States, either a foreign bank or U.S. bank subsidiary.
European Currency Unit: The official unit of account of the European Monetary System. It is a combination or basket of the currencies from the twelve European Community countries: the Deutsche mark, French franc, British pound sterling, Irish pound, Italian lira, Belgian franc, Dutch guilder, Luxembourg franc, Greek drachma, Spanish peseta, Portuguese escudo, and the Danish krona.
Even Lot: A unit of trading in a futures established by an exchange to which official price quotations apply. See Round Lot.
Even Up: To close out, liquidate, or cover an open position. Also to check a position with the broker for agreement as to its current standing.
Exchange of Futures for Cash: A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way the opposite hedges in futures of both parties are closed out simultaneously. Also called EFP (Exchange for Physical), AA (Against Actuals) or Ex-Pit transactions.
Exchange Rate: The price of one currency stated in terms of another currency.
Exchange Risk Factor: The delta value of an option as computed daily by the exchange on which it is traded.
Exercise: To elect to buy or sell, taking advantage of the right (but not the obligation) conferred by an option contract.
Exercise (or Strike) Price: The price specified in the option contract at which the buyer of a call can purchase the underlying during the life of the option, and the price specified in the option contract at which the buyer of a put can sell the underlying during the life of the option.
Exotic Options: Any of a wide variety of options with non-standard payout structures, including Asian options and Lookback options. Exotic options are mostly traded in the over-the-counter market.
Expiration Date: The date on which an option contract automatically expires; the last day an option can be exercised.
Extrinsic Value: See Time Value.
Ex-Pit: See Transfer Trades and Exchange of Futures for Cash.
F
FAB Spread: Five Against Bond. A futures spread trade involving the buying (selling) of a five-year Treasury bond futures contract and the selling (buying) of a long-term (15-30 year) Treasury bond futures contract.
Fannie Mae: See Federal National Mortgage Association.
FAN Spread: Five Against Note. A futures spread trade involving the buying (selling) of a five-year Treasury note futures contract and the selling (buying) of a ten-year Treasury bond futures contract.
Fast Market: An official condition in a trading pit where transactions in the pit or ring are taking place in such volume and with such rapidity that the pit chairman calls an official fast market condition. (See Fast Tape).
Fast Tape: Transactions in the pit or ring take place in such volume and with such rapidity that price reporters are behind with price quotations, so insert "FAST" and show a range of prices.
Federal National Mortgage Association (FNMA): A corporation created by Congress to support the secondary mortgage market; it purchases and sells residential mortgages insured by the Federal Home Administration (FHA) or guaranteed by the Veteran's Administration (VA).
Federal Reserve Board: A board of Directors comprised of seven members which directs the federal banking system, is appointed by the President of the United States, and confirmed by the Senate. The functions of the board include formulating and executing monetary policy, overseeing the Federal Reserve Bank, and regulating and supervising member banks. Monetary policy is implemented through the purchase or sale of securities, and by raising or lowering the discount rate — the interest rate at which banks borrow from the Federal Reserve.
Feed Ratio: The relationship of the cost of feed, expressed as a ratio to the sale price of animals, such as the corn-hog ratio. These serve as indicators of the profit margin or lack of profit in feeding animals to market weight.
FIA: See Futures Industry Association.
Fictitious Trading: Wash trading, bucketing, cross trading, or other schemes which give the appearance of trading. Actually, no bona fide, competitive trade has occurred.
Fill or Kill Order: An order which demands immediate execution or cancellation.
Financial Instruments: As used by the CFTC, this term generally refers to any futures or option contract that is not based on an agricultural commodity or a natural resource. It includes currencies, securities, mortgages, commercial paper, and indices of various kinds.
Financial Futures: Include interest rate futures, currency futures, and index futures.
First Notice Day: The first day on which notices of intent to deliver actuals against futures market positions can be received. First notice day may vary with each futures and exchange.
Fix, Fixing: See Gold Fixing.
Fixed Income Security: A security whose nominal (or current dollar) yield is fixed or determined with certainty at the time of purchase.
Floor Broker: Any person who, in any pit, ring, post or other place provided by a contract market for the meeting of persons similarly engaged, executes for another person any orders for the purchase or sale of any commodity or financial instrument for future delivery.
Floor Trader: An exchange member who executes his own trades by being personally present in the pit for futures trading. See Local.
F.O.B. (Free On Board): Indicates that all delivery, inspection and elevation or loading costs involved in putting commodities on board a carrier have been paid.
Forced Liquidation: The situation in which a customer's account is liquidated (open positions are offset) by the brokerage firm holding the account, usually after notification that the account is undercapitalized (margin calls).
Force Majeure: A clause in a supply contract which permits either party not to fulfill the contractual commitments due to events beyond their control. These events may range from strikes to export delays in producing countries.
Foreign Exchange: Foreign Currency. On the foreign exchange market, foreign currency is bought and sold for immediate or future delivery.
FOREX: An acronym for the Foreign Exchange Market. FOREX is a cash market where the currencies for many nations are traded via brokers located in various parts of the world. FOREX transactions are not traded in futures markets.
Forward: In the future.
Forwardation: See Contango.
Forward Contracting or Forward Contract: A cash transaction common in many industries, including commodity merchandising, in which a commercial buyer and seller agree upon delivery of a specified quality and quantity of goods at a specified future date. A price may be agreed upon in advance, or there may be agreement that the price will be determined at the time of delivery. Forward contract differ from futures contracts in that with futures contracts, quality, quantity, price, and place of delivery are all established by the Exchange as opposed to establishment of these factors by the individual parties to the agreement.
Forward Market: Refers to informal (non-exchange) trading of commodities to be delivered at a future date. Contracts for forward delivery are "personalized" (i.e., delivery time and amount are as determined between seller and customer).
Forward Months: Futures contracts, currently trading, calling for later or distant delivery. See Deferred Futures.
Forward Purchase or Sale: A purchase or sale between commercial parties of an actual commodity for deferred delivery.
Free Crowd System: A system of trading, common to most U.S. non-electronic futures exchanges, where all floor members may bid and offer simultaneously either for their own accounts or for the accounts of customers, and transactions may take place simultaneously at different places in the trading ring. Also see Board Broker System and Specialist System.
Frontrunning: With respect to futures and options, taking a futures or option position based upon non-public information regarding an impending transaction by another person in the same or related future or option.
Full Carrying Charge, Full Carry: See Carrying Charges.
Fundamental Analysis: Study of basic, underlying factors such as weather, wars, discoveries, and changes is government policy, which will affect the supply and demand of the underlying being traded in futures contracts. See Technical Analysis.
Fungibility: The characteristic of interchangeability. Futures contracts for the same commodity or financial instrument and delivery month are fungible due to their standardized specifications for quality, quantity, delivery date and delivery locations.
Futures: See Futures Contract.
Futures Commission Merchant (FCM): Individuals, associations, partnerships, corporations and trusts that solicit or accept orders for the purchase or sale of any commodity or financial instrument for future delivery on or subject to the rules of any contract market and that accept payment from or extend credit to those whose orders are accepted.
Futures Contract: An agreement to purchase or sell a commodity, currency, Index, or financial instrument for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) which obligates each party to the contract to fulfill the contract at the specified price; (3) which is used to assume or shift price risk; and (4) which may be satisfied by delivery or offset. The terms of the agreement are set by exchanges. In the case of a currency, index, financial instrument, or certain commodities (e.g., lean hogs), the purchase or sale is completed by delivery and acceptance of cash.
Futures-equivalent: A term frequently used with reference to speculative position limits for options on futures contracts. The futures-equivalent of an option position is the number of options multiplied by the previous day's risk factor or delta for the option series. For example, 10 deep out-of-money options with a risk factor of 0.20 would be considered 2 futures-equivalent contracts. The delta or risk factor used for this purpose is the same as that used in delta-based margining and risk analysis systems.
Futures Industry Association (FIA): A membership organization for futures commission merchants (FCMs) which, among other activities, offers education courses on the futures markets, disburses information and lobbies on behalf of its members.
Futures Price: (1) Commonly held to mean the price of a commodity for future delivery that is traded on a futures exchange. (2) The price of any futures contract.
G
Ginnie Mae: Pass-through mortgage-backed certificates guaranteed by the Government National Mortgage Association (GNMA or Ginnie Mae). The certificates are backed by pools of FHA insured and/or VA guaranteed residential mortgages, with the mortgage and not held in safekeeping by a custodial financial institution. Also called G.N.M.A.s or G.N.M.A. certificates.
Ginzy Trading: A trade practice in which a floor broker, in executing an order -- particularly a large order -- will fill a portion of the order at one price and the remainder of the order at another price to avoid an exchange's rule against trading at fractional increments or "split ticks." In In re Murphy, [1984-86 Transfer Binder] Comm. Fut L. Rep. (CCH) at pp. 31,353-4 (Sept. 25, 1985), the Commission found that ginzy trading was a noncompetitive trading practice in violation of section 4c(a)(B) of the Commodity Exchange Act and CFTC regulation 1.38(a).
Give Up: A contract executed by one broker for the client of another broker that the client orders to be turned over to the second broker. The broker accepting the order from the customer collects a wire toll from the carrying broker for the use of the facilities. Often used to consolidate many small orders or to disperse large ones.
Globex: 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. Developed by Reuters Limited for use by the Chicago Mercantile Exchange (CME), Globex was launched on June 25, 1992, for certain CME contracts. Various MATIF (Marche a Terme International de France) contracts began trading on the system on March 15, 1993.
G.N.M.A.: The Government National Mortgage Association; a government agency within the Department of Housing and Urban Development that, among other things, guarantees payment on mortgage-backed certificates. (See Ginnie Mae).
Gold Certificate: A certificate attesting to a person's ownership of a specific amount of gold bullion.
Gold Fixing (Gold Fix): The setting of the gold price at 10:30 AM (first fixing) and 3:00 PM (second fixing) in London by five representatives of the London Gold Market. See London Gold Market.
Gold/Silver Ratio: The number of ounces of silver required to buy one ounce of gold at current spot prices.
Good This Week Order (GTW): Order which is valid only for the week in which it is placed.
Good 'Til Canceled Order (GTC): Order which is valid at any time during market hours until executed or canceled. See Open Order.
GPM: See Gross Processing Margin.
Grades: Various qualities of a commodity.
Grading Certificates: A formal document setting forth the quality of a commodity as determined by authorized inspectors or graders.
Grain Futures Act: Federal statute which regulated trading in grain futures, effective June 22, 1923; administered by the U.S. Department of Agriculture; amended in 1936 by the Commodity Exchange Act.
Grantor: The maker, writer, or issuer of an option contract who, in return for the premium paid for the option, stands ready to purchase the underlying commodity (or futures contract) in the case of a put option or to sell the underlying commodity (or futures contract) in the case of a call option.
Gross Processing Margin (GPM): Refers to the difference between the cost of a commodity and the combined sales income of the finished products which result from processing the commodity. Various industries have formulas to express the relationship of raw material costs to sales income from finished products. See Crack and Crush.
GTC: See Good 'Til Canceled order.
GTW: See Good This Week order.
H
Haircut: (1) In determining whether assets meet capital requirements, a percentage reduction in the stated value of assets. (2) In computing the worth of assets deposited as collateral or margin, a reduction from market value.
Hardening: (1) Describes a price which is gradually stabilizing; (2) a term indicating a slowly advancing market.
Heavy: A market in which prices are demonstrating either an inability to advance or a slight tendency to decline.
Hedge Ratio: Ratio of the value of futures contracts purchased or sold to the value of the cash commodity being hedged, a computation necessary to minimize basis risk.
Hedging: Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later. Hedging is done to transfer the risk of loss. The position in the futures market is opposite to the position held in the cash market; i.e., a long cash position is hedged with a short futures position (short hedge), and vice-versa (long hedge).
Hog-Corn Ratio: See Feed Ratio.
Hybrid-Instruments: Financial instruments that possess, in varying combinations, characteristics of forward contracts, futures contracts, option contracts, debt instruments, bank depository interests, and other interests. Certain hybrid instruments are exempt from CFTC regulation.
