The Close

Why is it with futures that we see the Close at one price, and then a half-hour later it has moved to another price? Why isn’t the Close the same as “Last,” and what is the “Settlement”?

“Last” is the last price at which a contract traded. It has no meaning other than that.
The Close in electronic trading is something I have not been able to discover.

The Close in open outcry pit trading involves two things:

1. The Close generally refers to the final 3 minutes of trading, in most cases.

2. The Close is a price decided on by the pit committee and finalized by the pit chairman. It can actually be a price at which no futures contract traded during the entire day. (We explain how this can happen at our seminars.) The Close that you see within minutes or seconds after trading has ceased may not be the final price you see some time later. The reason for this is that if there are a lot of orders still outstanding when trading is complete, the pit chairman has the authority to re-open trading after a wait of about 15 minutes. Trading then continues for another 3 minutes, with a rule that prices must stay within the range of the previous Close. Therefore, you go to dinner thinking you are ahead by a few ticks and come back later to find out that you are behind by a few ticks.

Once a closing bell signals the end of a day’s trading, the exchange’s clearing organization matches each purchase made that day with its corresponding sale, and tallies each member firm’s gains or losses based on that day’s price changes – a massive undertaking considering that nearly two-thirds of a million futures contracts are bought and sold on an average day. Each firm, in turn, calculates the gains and losses for each of its customers having futures contracts.

Gains and losses on futures contracts are not only calculated on a daily basis, they are credited and deducted on a daily basis. Thus, if a speculator were to have, say, a $300 profit as a result of the day’s price changes, that amount would be immediately credited to his brokerage account and, unless required for other purposes, could be withdrawn. On the other hand, if the day’s price changes had resulted in a $300 loss, his account would be immediately debited for that amount.

The process just described is known as a daily cash settlement, and is an important feature of futures trading. It is also the reason a customer who incurs a loss on a futures position may be called on to deposit additional funds to his account.