General Futures Terminology

This is a vocabulary sheet: the one-liners carry the terms, and the gotchas carry the pairs the exam likes to swap.

Which Roles and Firms Get Swapped?

• Floor Broker (FB) executes orders for other people. Floor Trader (FT) trades for that person's own account.
• Scalper holds positions only briefly for small profits. Position Trader holds for days, weeks, or longer; the difference is holding period, not floor location.
• Futures Commission Merchant (FCM) solicits orders and accepts customer money to margin trades. Introducing Broker (IB) solicits orders but does NOT hold customer money, clearing instead through an FCM.
• Commodity Pool Operator (CPO) pools investors' funds to trade futures collectively. Commodity Trading Advisor (CTA) advises others on futures for compensation.
• Associated Person (AP) is the registered salesperson soliciting orders for an FCM, IB, CPO, or CTA.

Which Price and Market-Structure Terms Come Up Most?

• Basis = cash (spot) price minus futures price, the hedging relationship between the two markets.
• Carrying charges = storage, insurance, and financing (interest), the cost of holding a commodity over time; higher charges push distant months above nearby ones.
• Normal market = distant months priced higher than nearby, also called a carrying-charge market, a premium market, or contango.
• Discount = a price reduced for a lower grade, a deferred month trading below a nearby one, or cash sitting below futures.
• Spot = the cash market for immediate delivery; Deferred = any delivery month later than the nearby (spot) month.
• Limit up/down (daily price limit) = the maximum single-session move an exchange permits. Lock limit = the price has moved the full limit and cannot trade beyond it.

Which Contract, Position, and Delivery Terms Matter?

• Forward contract = a private, customized OTC agreement with no clearinghouse, unlike the standardized, exchange-traded, cleared futures contract.
• Clearinghouse = becomes buyer to every seller and seller to every buyer (novation), guaranteeing performance and backed by margin and daily marking to market.
• Long = bought a futures contract, obligated to take delivery if held into delivery. Short = sold a futures contract, obligated to make delivery.
• First Notice Day = the first day a short can announce intent to deliver; it starts the delivery period, not expiration.
• Warehouse receipt = the transferable document a short uses to deliver the physical commodity against a futures position.
• Churning = excessive trading of an account by a person who controls it, done to generate commissions, a prohibited sales-conduct violation.

Which Gotchas Trip Students Up?

• Floor Broker executes for other people; Floor Trader trades their own account. The names look nearly identical, so the exam swaps them.
• Money-handling is the FCM-versus-IB line. If the firm carries customer funds, it is an FCM; if not, it is an IB clearing through an FCM.
• THE BIG ONE: glossary basis means cash price minus futures price, not the "basis grade" (standard deliverable quality) from delivery provisions. Same word, unrelated ideas.
• Long and Short describe the futures position, not physical ownership. You do not need to already own a commodity to go short a futures contract.
• Churning requires control of the account, not just a high volume of trades.

One-Breath Recap

This glossary covers the futures vocabulary the exam assumes: a Floor Broker executes for other people while a Floor Trader trades their own account, an FCM holds customer money while an Introducing Broker does not and clears through one, and a Commodity Pool Operator pools funds while a Commodity Trading Advisor advises for pay; basis means cash price minus futures price, carrying charges (storage, insurance, financing) push a normal market's distant months above nearby ones, and a forward is private and uncleared where a futures contract is standardized, exchange-traded, and guaranteed by a clearinghouse through novation. Long means bought and obligated to take delivery, short means sold and obligated to make delivery, and neither implies already owning the physical commodity; First Notice Day starts the delivery period, and churning is excessive, controlled trading done to generate commissions.

Need more than the recap? Read the full General Futures Terminology unit.