In my Commodity Futures classes, I emphasize the fact that there is no knowledge pinnacle in the business of Futures trading. One must always keep an open mind and constantly be studying the markets for inevitable changes that will occur. Just as the best instructor is a student always in the learning mode, so must be a successful trader.

The majority of Commodity markets are now traded on an electronic platform and/or also in the open outcry venue at an exchange. Even though they have both electronic and open outcry, the markets still have the traditional open of the trading day followed by the closing of the trading day. After the close, the exchanges create what is known as a settlement price. Once this price is established you will usually see a small "s" next to the last price of the day. This is referred to as the settle price. Each exchange, and as you will see each market, has their unique way of calculating this settlement price. Below is how the Chicago Mercantile Group (CME) calculates their settlement prices on a few of the popular markets.


CME Group Daily Settlement Procedures

Equity Futures:

For S&P and NASDAQ, the settlement price of the lead month contract is the midpoint of the closing range based on pit trading activity between 15:14:30-15:15:00 CST. For all other equity indices, the Volume Weighted Average Price (VWAP) of trades executed on Globex between 15:14:30-15:15:00 CST is used to determine the settlement prices for the lead month contracts.

Treasury Futures:

Globex trades in the lead month between 13:59:30-14:00:00 CST are used to derive the VWAP; back months are settled based on traded/quoted spread relationships.

FX Futures:

For liquid currencies, Globex trades in the lead month between 13:59:30-14:00:00 CST are used to derive the VWAP; back months are settled based on traded/quoted spread relationships.

Energy Futures:

The front month in NYMEX WTI Crude Oil, Natural Gas, Heating Oil, and RBOB futures is settled at the VWAP of trades occurring on Globex between 14:28:00-14:30:00 EST.

As you can see each market handles this process a bit differently. Looking at the way each market comes to this settlement price, you can see that the close of the day comes first, then the settlement price. After discussing the settlement price some more, I want to share with you an exchange that does not come by the settlement price in the same way.

Again, it is important for you to understand how these markets work internally as well as understand how to trade them. This will make you a more rounded Futures trader and will assist you in keeping up-to-date with the latest market changes.

Why is this settlement price important? These prices are necessary for determining profits and losses on any Futures contracts you may be holding overnight. At the end of each trading day, all Futures accounts are marked to market by the Futures Clearing Merchant (FCM).
The FCM is where your account cash position is held. At this time, each account that has or has had a position since yesterday's close will have their account credited or debited depending on if they have a winning or losing position on the books. If you have closed out a position and have a profit, the funds are available immediately after the close of trading. No waiting for 3 days as you do in Equities.
The settlement price can also be used to let the FCM know if you are subject to a margin call due to insufficient funds in your account to maintain any open positions you may have. If your account balance falls below the minimum amount required by the exchanges, then you have two options:

  • Close-out the position

  • Replenish the account with cash to bring the account back up to the exchange requirements

For traders who calculate floor trader pivots or any other formula that has the closing price, I would recommend you wait for about 5 minutes after the market close to get this settlement price. Keep in mind that the majority of intra- day charts do not post the settlement price as the last tick on your chart for the day. You should look at a daily time frame chart for the actual settlement price. This is very helpful for gap traders. A gap will be considered filled when the settlement price is touched, not the last close on your intra-day chart.

I wrote this for traders who are considering trading markets on the Intercontinental Exchange (ICE). This is an all-electronic exchange and has no open outcry pits. They recently acquired the Russell 2000 index from the CME. In 2007, ICE acquired the New York Board of Trade (NYBOT). In this deal, they received the trademarks to the likes of Sugar, Cocoa, Coffee, Orange Juice, and many more. The NYBOT was housed in the World Trade Center. These markets all used to trade in pits and had daily open and closes just like all other markets. Today they are all electronic and no pits. ICE has changed the trading hours to accommodate our international trading partners and to make the markets available for more hours of the day.

Even though these markets are all electronic, they are still traded by humans. We as humans have habits and this is an area where old habits die hard. Markets can trade for 24 hours a day, but there will still be a time of day that will have the most participants trading. There is just no way a human being can sit at a screen for 24 hours and trade successfully. What I am seeing in these electronic exchanges is that whatever the regular day session was for the Commodity while it traded in the pit is now becoming the most liquid time of day to trade that market. Many of the traders who used to trade in the pits have been forced to move to a screen to execute their orders now. They have simply carried over their habits with this move.

You, too, can see this observation with any market. Open a 10-minute chart of a Commodity. Place a Volume study at the bottom of the screen. Then look at the all sessions chart. Let's examine sugar, for example. This market opens at 3:30 EST and closes at 14:00 EST. If you look at the Volume figures, you will see that there is more trading from 8:00 EST until 13:30 EST than the other hours that Sugar is open. These higher volume periods are also what the pit sessions in New York used to trade. Knowing these higher volume times can be of help if you are looking for increased liquidity and day trading opportunities. This same tool can be used to identify the most liquid times of day to trade any electronic exchange market. The odds are very high that whatever the pit hours were, today will be the same in the electronic exchanges.

Now, here is a little quirk that the ICE exchange has. I call it a quirk because it drives me crazy. Instead of creating their settlement price after the close, like most exchanges do, they create a settlement price and continue to trade for an extended period depending on the market involved.

Let's look at Sugar again. The contract specification for Sugar shows that the electronic exchange opens at 3:30 EST and closes at 14:00 EST. Just like any other market right? It has an open and a close time. Here is where it gets tricky. That settlement price we were discussing earlier is created between 13:28 and 13:30 EST each day. There is no pause in trading at this time, we simply keep on trading until 14:00 EST when the trading stops. This can create all kinds of confusion to an uninformed trader. When you come in the next day, your charts will have two closes for Sugar. If you look at a daily chart and an intra-day chart, you will see this discrepancy. The daily chart will post the settlement price that occurred at 13:28 to 13:30 EST and the intra-day chart will show the close from 14:00 EST. A lot can happen in 30 minutes of trading so these two numbers are usually far apart. If you are a gap trader, you can see where this is a problem. Which price has to be touched to close the gap? If you are calculating floor trader pivots, which close do you use? The answer I came up with is always use settlement price. Larger time frames rule and that is where settlement prices are found.

I have done research on this question of why do we settle before we close. Upon contacting the exchange, where you would expect to get the correct answer, I hear "it's just done that way." Guess that is why they get paid the big bucks? It wasn't long before I found out from a trader friend in Chicago that the reason is that when the pits were open for trading, that the markets settled at this time. I guess human nature and habits really don't change.

The Cocoa market is much the same. This market opens at 4:00 EST and closes at 14:00 EST. However, the actual settlement price for the trading day is calculated between 11:48 and 11:50 EST. If you do some research from when Cocoa traded in the pits at the NYBOT, you will see that this market closed and settled at 11:50 EST. When you start your trading day and you will be looking at Cocoa, make sure to use the 11:50 EST settlement price as the actual close from the previous day, not the 14:00 EST close.

I am not saying what the ICE exchange does is right or wrong, but you can certainly see where the confusion can come from. By bringing this to your attention, I hope it spares you some frustration and possibly capital loss. For these very reasons, I always encourage traders to know the market they are about to invest hard-earned capital in.

Hoping that everybody is off to a good start to trading this year and that you are following your rules as you move onto fulfilling your dream of trading for a living.