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What is a “Market”?

by | Futures 101

In its simplest form, a “market” is the bid and ask quote for any futures contract or option.  If there is no bid/ask, then there is no market.  The market is the bid/ask.  Some people think the market is the exchange.  However, the exchange only provides the infrastructure to make a market, but it does not supply the bids and asks.  Only traders that are willing to bid for a contract or have an asking price for a contract can form a market.

Is the last traded price where the market is?  No, the last traded price could have just taken place or a few minutes ago.  While the last traded price is a good reference for where the market actually traded, the current live market is solely determined by the bid and the ask.

Some markets are highly active, like the E-mini S&P 500, the Euro Currency, Corn, and US 10 Year Notes.  These markets have high volume, open interest and a massive amount of bids and asks in the front months for their contracts.  On the other side of the spectrum, some contracts may be listed on the exchange, but barely have a market at all.  Pork Bellies and Uranium are great examples of listed contracts with very little volume, open interest, and bid/ask activity.  Even if those markets have active bid/asks, they are going to be wide due to the low participation in that contract.

Options are a great example of how markets are made.  Let’s say you want to get into a July Corn $7.00/$7.50 bull call spread.  In order to get a “market” for this spread, we would have to call down to the floor at the CBOT and ask the bid/ask for that call spread.  The floor broker will go to the pit and find out what the “market” is for the July Corn $7.00/$7.50 call spread.  There will be a price at which the floor traders are willing to buy the spread and a price they are willing to sell it.  The floor traders are creating the market by providing bids and asks.

Please click to view the Options and Spreads risk disclosures below.

The next time you trade options, option spreads or low open interest futures contracts, make sure you find out where the market is.  It is not enough to look at the last traded price.  The last trade price could be a few minutes old, a few hours old, or it could even be the prior day’s settlement price.  While the last trade price might not be updated for low volume contracts, the bid/ask will always be up to date.

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About Craig Turner

Craig Turner is a Senior Broker at Daniels Trading, author of Turner’s Take newsletter, and a Contributing Editor for Grain Analyst. Craig is often quoted in the Wall Street Journal, Reuters, Dow Jones Newswire, Corn & Soybean Digest, and also makes appearances on SiriusXM – Rural Radio Channel 80 providing commentary for the Grain and Livestock markets. Craig has also been featured in FutureSource’s Fast Break series, Futures Magazine Online, and INO.com. Mr. Turner has a Bachelors from the Rensselaer Polytechnic Institute (RPI) where he graduated with honors and has worked at the NYSE and Goldman Sachs. While at Goldman, Craig earned his MBA in the NYU Stern executive program. Learn more about Craig Turner.

Risk Disclosure

WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED.

WHEN SELLING OPTIONS, YOU MAY LOSE MORE THAN THE FUNDS YOU INVESTED.

STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION.

YOU SHOULD BE AWARE THAT IN THE EVENT YOU LIQUIDATED THE LONG SIDE OF A BULL CALL SPREAD AND STILL MAINTAINED THE SHORT OPTION POSITION, THEN YOUR RISK WOULD BE UNLIMITED.

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.