Futures Glossary of Terms, definitions, acronyms, common terms

A

Actuals: Actual physical commodities as distinguished from futures contracts.
Arbitrage: Involves a purchase in one market and a sale in a different market or different commodity to capitalize on what appear to be temporary distortions in price. Riskless (or almost riskless) arbitrage involves delivery of the actual commodity, but the term is also used to refer to any trading between markets aimed at profiting from price discrepancies (see Spread).
Arbitration: The procedure of settling disputes between members, or between members and customers.
Ask: The price at which an instrument is offered.
ASX: Australian Securities Exchange Limited.
At the Market: Orders to buy or sell "at the market" require a prompt execution of the order when it reaches the trading floor at the best possible price.

B

Backwardation: Market situation in which prices are progressively lower in the future delivery months than in the nearest delivery month. For instance, if the Wool quotation for arch is 480¢/kg. and that for July is 450¢/kg, then the backwardation for five months against March is 30¢/kg. (Backwardation is the opposite of Contango).
Basis: The price difference between the actual or spot commodity and the futures market.
Basis Grade: Grade of a commodity used as the standard of the futures contract.
Bear: One who expects a decline in prices (the opposite of "bull").
Bear Market: Any market in which prices are in a declining trend.
Bearish & Bullish: When conditions suggest lower prices a bearish situation is said to exist. If higher prices appear warranted; the situation is said to be bullish.
Bid: An offer to buy, subject to immediate acceptance unless otherwise indicated, a definite quantity of a commodity at the (bid) price stated.
Bid-Offer Spread: The difference between the buy (bid) and sell (offer) price of a currency or financial instrument.
Break: A sharp decline or a sharp rise in price, usually after a sustained period of little or no movement.
Broker: A trader or trading company given responsibility for the acceptance and/or execution of an order.
Brokerage: The fee charged by a broker for execution of a transaction.
Bull: One who expects a rise in prices. (The opposite of "bear").
Bull Market: A market in which prices are in an upward trend.

C

Cash Commodity: The actual physical commodity as distinguished from futures contracts. Sometimes called "spot commodity".
Cash Settlement: A procedure for settlement of contracts by automatic close-out at a cash price designated by the Clearing House in futures markets which make no provision for delivery, ie. Share Price Index.
Clearing: The process of matching, registering and guaranteeing transations.
Clearing House: A body that guarantees the fulfillment between Clearing Members of all contracts traded on the Exchange. The Clearing House holds all deposit and margin requirements of the Clearing Members who have to cover their commitments with the Clearing House on a day to day basis. The Clearing House handles all cash settlement within the market.
Clearing Member: A member of the Clearing House to whom fulfillment of all contracts, registered in their own name, is guaranteed.
Close Out: To liquidate a position or fulfil an obligation by taking an equal and opposite position ie. a trader who has bought a futures contract, would close-out, or get out of the contract , by taking out a contract to sell.
Contango: Market situation in which prices are progressively higher in the future delivery months than in the nearest delivery month. For instance, if the Wool quotation stands at 450¢/kg for March and at 480¢/kg for July, then the Contango for five months (against March as a basis) is 30¢/kg. (Contango is the opposite of Backwardation).
Contingent order: Instructions you give us to attach a stop loss and/or limit order to your opening order if it is triggered and filled.
Contract Month: The month in which delivery or cash settlement is to be made in accordance with a futures contract.
Contract Unit: The actual amount of a commodity designated in a given futures contract.
Cost of Carry: The interest rate parity, where the forward price is determined by the cost of borrowing money in order to hold position.
Coupon: The annual rate of interest that a bond guarantees to pay based on the bond's face value.
Current Delivery Month: The futures contract which matures and becomes deliverable during the present month; also called spot month.

D

Day Only Order: Order which automatically expires at the close of the day's trading if not filled during the day on which the order was received.
Day Trading: Establishing and liquidating the same futures market position within one day.
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.
Deliverable Types: These refer to the actual types or grades of physical commodity which may be delivered under Exchange rules in settlement of a futures contract.
Delivery: The tender and receipt of the actual commodity, or warehouse receipts covering such commodity, in settlement of a futures contract. Note that in some commodities no delivery provision exists as settlement is made in cash.
Delivery Month: A specified month during which actual delivery of the commodity may be made under terms of a futures contract. Each futures contract must state the month of delivery. Current delivery means delivery during the current month. Note that in some commodities no delivery provision exists as settlement is made in cash.
Deposit: See initial margin.

E

Expiry Month: A specified month during which the futures contract expires and actual delivery of the futures commodity takes place, or settlement is made in cash.

F

First Notice Day: The first day on which notices of intention to deliver actual commodities against futures market positions can be received. First notice day will vary with each commodity and exchange.
Full Participant: Any firm or corporation which has been granted Full Participant status with the Sydney Futures Exchange Limited (SFE). These Members may act for themselves or on behalf of their clients who are charged a commission for the service.
Forward Agreement: An over-the-counter agreement made forward in time.
Futures: The term applied to trading in identical contracts for delivery of a commodity at a future date. All futures trading in the same contract involve the same unit of trading. All futures trading is subject to the rules of the exchange where the contract is listed, and consequently the terms of all trades completed in any commodity on that exchange in the same delivery month are identical.

G

Gross Liquidation Value (GLV): The residual dollar value of a futures trading account assuming it were liquidated at the going prices of the markets involved.

H

Hedge: Take a position (ie. buy or sell) in the futures market as a means of reducing the risk of price fluctuation in the physical market.

I

Iceberg Orders: A large single order that has been divided into smaller lots, usually by the use of an automated program, for the purpose of hiding the actual order quantity.
Initial Margin: The Clearing House determines a minimum deposit (initial margin) on all contracts traded on the market. This margin must be paid by the client to the Clearing Member and is then lodged by the Clearing Member with the Clearing House.

L

Last Trading Day: The final day under an exchange's rules during which trading may take place in a particular delivery futures month. Futures contracts outstanding at the end of the last trading day must be settled by delivery of physicals or by cash settlement. (See cash Settlement)
Limit: The definite price stated by a customer to a broker restricting the execution of an order to buy for not more than, or to sell for not less than, the stated price.
Limit Orders: An order placed to buy or sell a market at a specified price or better.
Liquid Market: A market where selling and buying can be accomplished with ease because of high volume.
Long: A trader who has bought futures contracts or who owns actuals which are unhedged. "Net Long" refers to a trader whose total purchases exceed the total sales in the trader's open futures contracts.
Lot: Usually a specific quantity of a standard grade of a commodity, or a unit of trading equivalent to one futures contract.

M

Mandatory Settlement: Process whereby cash settled futures contracts still open at expiry are closed out by mandatory cash settlement.
Margin Call: A communication to a client asking to cover an adverse price movement on a futures position.
Minimum Price Fluctuation: Smallest increment of price movement possible in trading a given futures contract.
MOC Orders: A market order that is submitted to execute as close to the closing price as possible.

N

Net Position: The difference between the open long contracts and the open short contracts held in any one commodity by an individual or group.
Novation: Novation is the substitution of a new contracting party for an existing contracting party. Such a facility allows complete flexibility to enter or quit the market at will.

O

Offer: A communication indicating a willingness to sell at a given price. Opposite to Bid.
Open Position: The total number of futures contracts entered into a particular delivery month or futures market which have not been liquidated by an offsetting futures transaction or by actual physical delivery at the end of the trading period.

P

Parked Orders: Facilitates frequently placed orders and allows users to place multiple orders simultaneously.
Premium: The excess of one futures contract price over that of another. Also the difference by which one spot commodity sells over another grade of the same or another spot commodity. Also the cost to a buyer to purchase an option.

R

Rally: An upward movement of prices that follows a decline.
Range: The difference between the highest and the lowest price at which a given futures contract has traded during a particular period of time, ie. opening period of the market, closing period of the market, day, week, month, etc.
Retracement: A decline in prices following an advance - the opposite of a rally.
Recovery: An upward movement of the price after decline.
Risk Capital: Funds not needed for routing living expenses that are available for purposes of investing or speculating.
Risk Factor: The risk factor (delta) indicates the risk of an option position relative to that of the related futures contract.
Round Turn: A completed transaction involving both a purchase and ale or a sale followed by a liquidated purchase.

S

Settlement Price: The official closing price calculated at the end of each trading session. It is usually the mid-point of closing bid and offer.
Settlement Date: The date on which the contract is settled.
SGX: Singapore Exchange Ltd.
Short: (1) The sold side of an open futures contract. (2) A trader whose net position shows an excess of open sales positions over open long positions. (See Long).
Short Covering: The act of buying back a speculative short position on a steady or rising market, despite the original intention to await a market drop.
Short Selling: Agreeing to sell a commodity not presently owned with the intention of buying at a later date.
Slippage: Slippage is the filling of an order at a higher or lower price than would have normally been anticipated. Slippage may occur with any order, buy or sell, that can be executed without any set price limit, ie On Stop, Market, Market if Touched, Market On Open, Market On Close, At Best.
Smart Orders: Achieving best execution of trades while minimising market impact.
SPAN®: Margining system for futures and options, known as Standard Portfolio Analysis of Risk®, was developed by the Chicago Mercantile Exchange and is the most widely adopted margining system in the global futures industry.
Speculation: A person entering into futures contracts for any purpose other than hedging. One who attempts on the basis of existing conditions to anticipate price changes and to trade accordingly in order to make capital gains.
Spot: Market for immediate delivery of the product and immediate payment. Also refers to the nearest delivery month on a futures contract.
Spot Month: See Current Delivery Month.
Spot Price: The price quoted for the actual physical commodity - same as Cash Price.
Spread: The purchase of one future month against the sale of another future month of the same commodity. A spread trade is based on a price relationship between the two months and a belief that the "spread" or difference in price between the two contract months will change sufficiently to make the trade profitable.
Square: Purchase and sales of futures contracts are in balance and thus the client has no open position.
Squeeze: Situation in which those who are short cannot repurchase their contracts, except at a price substantially higher than the value of these contracts in relation to the rest of the market.
Stop Entry: Orders to enter the market at a less favorable price.
Stop Exit: Orders to exit the market at a less favorable price.

T

Tapes: All conversation between a customer and a futures broker are recorded.
Tick: Minimum change in price, up or down.
Trailing Stop: Designed to allow an investor to specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain.
Trend: The general direction, either upward or downward, in which prices are moving.

U

Underlying Commodity: The commodity on which a futures contract is based and which must be accepted or delivered in the futures contract goes to delivery.

V

Variation Margin: Additional deposit required from a client when the futures price moves against the position, and paid to a client when the market moves in the client's favour. Under the SFE's rules, brokers must call margins from a client as soon as practicable.
Volume of Trading: The number of purchases and sales of futures contracts during a specified period.

Y

Yield: The effective interest rate on a fixed interest security until its maturity. For a bond, the calculation assumes it will be held to maturity and the interest received will be re-invested.

Futures Glossary

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