Series 3 - National Commodities Futures

Chapter13

Chapter46

Chapter79

AAA

Chapter1011

1.Preface

3.7Leverage

2.GettingStarted

3.8GeneralFuturesTerminology

3.GeneralTheory

3.9GeneralOptionsTerminology
3.10SummaryAndReview
3.11Answers

General Theory - General Futures Terminology

GeneralFuturesTerminology
Thissectionintroducesthecandidatetocommonfuturesvocabulary.Forthesedefinitions,theauthorreliedontheonlineglossary
providedbythefuturesexchanges'regulator,theCommodityFuturesTradingCommission(CFTC).
Thesetermsbelowarebynomeanstheonlyonesyouneedtoknow,buttheyaretheonesspecifiedbytheNationalFutures
Association's(NFA's)studyoutline,soyoucanexpectacouplevocabularyquestionsaboutthemontheSeries3exam.
Definitionshereareforreference.Theseconceptswillbeexploredinmoredepthinlaterchapters.
AfewtermsspecifiedbytheNFA,butthatwerealreadydefinedinthischapter,areomittedhere.
Roles
AssociatedPerson(AP):Anindividualwhosolicitsoraccepts(otherthaninaclericalcapacity)orders,discretionaryaccounts,
orparticipationinacommoditypool,orsupervisesanyindividualsoengagedonbehalfofaFuturesCommissionMerchant,an
IntroducingBroker,aCommodityTradingAdvisororaCommodityPoolOperator.
CommodityPoolOperator(CPO):Apersonengagedinabusinesssimilartoaninvestmenttrustorasyndicatewhosolicitsor
acceptsfundsforthepurposeoftradingcommodityfuturescontracts.
CommodityTradingAdvisor(CTA):Apersonwho,forcompensation,regularlyengagesinthebusinessofadvisingothersasto
thevalueofcommodityfuturesortheadvisabilityoftradingincommodityfutures,orissuesanalysesorreportsconcerning
commodityfutures.
FloorBroker(alsoknownasacommissionhousebroker):Apersonwithexchangetradingprivilegeswho,inanyplace
providedbyanexchangeforthemeetingofpersonssimilarlyengaged,executesforanotherpersonanyordersforthepurchaseor
saleofanycommodityforfuturedelivery.
FloorTrader:Apersonwithexchangetradingprivilegeswhoexecuteshisowntradesbybeingpersonallypresentinthepitorring
forfuturestrading.
FuturesCommissionMerchant(FCM):Apersonorfirmthatsolicitsoracceptsordersforthepurchaseorsaleofany
commodityforfuturedelivery,onorsubjecttotherulesofanyexchange,andthatacceptspaymentfromorextendscreditto
thosewhoseordersareaccepted.
IntroducingBroker(IB):Apersonwhosolicitsoracceptsordersforthepurchaseorsaleoffuturescontracts,butdoesn'taccept
collateralagainstanyresultingtradesorcontracts.
PositionTrader:Acommoditytraderwhoeitherbuysorsellscontractsandholdsthemforanextendedperiodoftime,as
distinguishedfromadaytrader,whowillnormallyinitiateandoffsetafuturespositionwithinasingletradingsession.
Scalper:Aspeculatoronthetradingfloorofanexchangewhobuysandsellsrapidly,withsmallprofitsorlosses,holdinghis
positionsforonlyashorttimeduringatradingsession.Typically,ascalperwillstandreadytobuyatafractionbelowthelast
transactionpriceandtosellatafractionabove,e.g.,tobuyatthebidandsellattheofferoraskprice,withtheintentofcapturing
thespreadbetweenthetwo,thuscreatingmarketliquidity.

Process,PricingandRegulation
Basis:Thedifferencebetweenthespotpriceofacommodityandthepriceofthenearestfuturescontractforthesame
commodity.Cashfutures=basis.
Bucketing:Takingtheoppositesideofacustomer'sorderintoabroker'sownaccount,orintoanaccountinwhichabrokerhas
aninterest,withoutopenandcompetitiveexecutionoftheorderonanexchange.Aviolation,bucketingentailsholdingcustomer
orderswithoutimmediatelyexecutingthem.
Churning:Excessivetradingofadiscretionaryaccountforthepurposeofgeneratingcommissions,whiledisregardingthefinancial
objectivesofthecustomer.
Convergence:Thetendencyforpricesofphysicalsandfuturestoapproachoneanother,usuallyduringthedeliverymonth.
DeferredMonths:Allfuturesdeliverymonthsbeyondthenextone.
ExpitTransactions:EntriesmadeuponthebooksofFuturesCommissionMerchantsforthepurposeof:
1.transferringexistingtradesfromoneaccounttoanotherwithinthesamefirmwherenochangeinownershipisinvolved
2.transferringexistingtradesfromthebooksofoneFCMtothebooksofanotherFCMwherenochangeinownershipisinvolved.
FirstNoticeDay:Thefirstdayonwhichnoticesofintenttodeliveractualcommoditiesagainstfuturesmarketpositionscanbe
received.
Limit(UporDown):Themaximumpriceadvanceordeclinefromthepreviousday'ssettlementpricepermittedduringone
tradingsession,asfixedbytherulesofanexchange.
LockedLimit:Apricethathasadvancedordeclinedthepermissiblelimitduringonetradingsession.
Pit:Aspeciallyconstructedareaonthetradingfloorwheretradinginafuturescontractoroptionisconductedcalledaringon
someexchanges.
Retender:Thereturnofafuturecontract'snoticetotheclearinghouseinadvanceofitsreissue.
Variationcall:Margincallpaymentmadeonadailyorintradaybasisbyaclearingmembertotheclearinghouse,basedon
adversepricemovementinpositionscarriedbytheclearingmember.

Next:GeneralOptionsTerminology