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.
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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