General Futures Terminology

This is a vocabulary and reference unit: skim it to lock in the words, then lean on the gotchas under each group for the pairs the exam likes to swap.

Floor and Participant Roles

These five terms describe who is standing in the market and what they are doing there. The two distinctions the exam presses on are for-others vs own-account and short holding vs long holding.

• Floor Broker (FB): an individual with exchange trading privileges who executes futures or options orders for other people (for customers or other members), not for the individual's own account.
• Floor Trader (FT): an individual with exchange trading privileges who buys and sells futures or options for that person's own account, trading their own money rather than executing customer orders.
• Scalper: a floor speculator who buys and sells very rapidly for small profits or losses, holding positions only briefly (often seconds or minutes) within a single session; by standing ready to buy at the bid and sell at the offer, a scalper adds market liquidity.
• Position Trader: a speculator who establishes a position and holds it for an extended period (days, weeks, or longer), rather than closing out within one session; the difference from a scalper is holding period, not floor location.
• Pit: a specially constructed, tiered area on the trading floor of some exchanges where open-outcry trading in a contract or option is conducted (on some exchanges the equivalent area is called the ring).

Exam Tip: Gotchas

• Floor Broker executes for other people; Floor Trader trades their own account. The words look almost identical, so the exam swaps them. Broker = agent for customers or other members; Trader = principal for himself.
• Scalper vs Position Trader is a holding-period distinction, not floor-versus-office. A scalper flips in and out within a session for tiny margins; a position trader holds for days or longer. Both can be floor participants; the difference is how long they stay in the trade.

Firm and Registration Categories

These five are the registration categories you meet by name here and study in full later in the Regulations chapter. The single line that separates each pair is worth fixing now.

• Futures Commission Merchant (FCM): a firm that solicits or accepts orders to buy or sell futures or options AND accepts money or other assets from customers to margin those trades; roughly the futures-industry counterpart to a securities brokerage that holds customer funds.
• Introducing Broker (IB): a person or firm that solicits or accepts customer futures or options orders but does not accept customer money or assets to margin the trades; an IB introduces the business and clears it through an FCM, which holds the funds.
• Associated Person (AP): an individual who solicits orders, customers, or customer funds (or supervises anyone who does) on behalf of an FCM, IB, CPO, or CTA; essentially the registered salesperson working for one of those firms.
• Commodity Pool Operator (CPO): a person or firm that operates a commodity pool, soliciting and pooling investors' funds to trade futures or options collectively, and either making the pool's trading decisions or hiring a CTA to do so.
• Commodity Trading Advisor (CTA): a person or firm that, for compensation, regularly advises others on the value of, or the advisability of trading, futures or options, or issues analyses and reports about them.

Exam Tip: Gotchas

• Money-handling is the FCM-versus-IB line. An FCM takes orders AND holds customer money; an IB takes orders but does NOT hold customer money, clearing instead through an FCM. If the firm carries the funds, it is an FCM.
• Pooling-versus-advising is the CPO-versus-CTA line. A CPO pools investors' money into a commodity pool; a CTA advises others on futures for pay. The AP is the individual salesperson soliciting orders for any of these firms, not a firm itself.

Price and Market-Structure Terms

These eight terms describe the prices and the shape of the market. The one the exam builds whole questions around is basis, and it hinges on cash minus futures.

• Basis: the difference between the cash (spot) price of a commodity and the price of the related futures contract, typically computed as cash price minus futures price; this is the hedging concept used to measure how the two markets move relative to each other.
• Carrying charges: the total cost of owning and holding a physical commodity over time, made up of storage, insurance, and financing (interest), plus minor incidental costs; higher carrying charges are what push distant delivery months above nearby ones in a normal market.
• Discount: the amount a price is reduced for a commodity of grade lower than the contract's par (standard deliverable) grade; also used more loosely for a deferred delivery month trading below a nearby one, or for the cash price sitting below the futures price.
• Normal Market: a market in which distant (deferred) delivery months trade at higher prices than nearby months, an upward-sloping price structure driven by carrying charges; also called a carrying-charge market, a premium market, or contango.
• Deferred: the distant delivery months of a contract, meaning any delivery month later than the nearby (spot/front) month; a deferred contract calls for delivery further out on the calendar.
• Spot: the cash market for the physical (actual) commodity for immediate delivery and payment, as distinguished from the futures market; the spot (nearby) month is the delivery month closest to expiration.
• Limit up/down: the maximum price advance (limit up) or decline (limit down) from the prior session's settlement price that an exchange permits in a single session; also called the daily price limit.
• Lock limit (locked limit or limit move): the condition where a contract's price has moved the full permissible daily limit up or down and trades cannot occur beyond that limit, so the market is effectively "locked" at the limit price.

Exam Tip: Gotchas

• THE BIG ONE: glossary basis here means cash price minus futures price (the hedging relationship between the two markets). It is NOT the "basis grade" (the standard deliverable quality) from the delivery-provisions unit, even though both share the word "basis." When a question pairs "basis" with a hedge or a cash-versus-futures spread, it means this cash-minus-futures basis; the deliverable-quality meaning belongs to delivery provisions.
• Normal, carrying-charge, premium, and contango all name the same upward slope (deferred months priced above nearby months). Do not treat any of them as a different structure.

Contract, Position, and Delivery Terms

These six terms cover how a futures obligation is created, guaranteed, and closed out or delivered. Long and Short are the pair students most often misread as physical ownership.

• Forward contract: a private, customized agreement between two parties to buy or sell an asset at a future date at a price set today, negotiated over-the-counter with no clearinghouse (contrast the standardized, exchange-traded, cleared futures contract).
• Clearinghouse: the entity tied to a futures exchange that becomes the buyer to every seller and the seller to every buyer (novation), guaranteeing performance on every contract and backing that guarantee with margin and daily marking to market.
• Long: a market position established by buying a futures contract; it obligates the holder to take delivery of the underlying commodity if the position is held into delivery (the long profits when prices rise).
• Short: a market position established by selling a futures contract; it obligates the holder to make delivery of the underlying commodity if the position is held into delivery (the short profits when prices fall).
• First Notice Day: the first day on which a seller (short) can issue a notice of intent to deliver the actual commodity against a futures position; it marks the start of the delivery period and varies by commodity and exchange.
• Warehouse receipt: a document issued by an approved warehouse or depository that evidences ownership of a stored commodity; it is the transferable delivery instrument the short uses to deliver the physical commodity against a futures contract.

Exam Tip: Gotchas

• Long and Short describe the futures position, not physical ownership. Long = bought a contract, obligated to take delivery; Short = sold a contract, obligated to make delivery. You do NOT have to own the commodity to go short a futures contract, and going long does not mean you already hold the physical. An answer that equates "short" with "must already own it to sell" is wrong.
• First Notice Day starts the delivery period; it is not expiration. It is the first day the short can announce intent to deliver, and it varies by commodity and exchange.

Sales-Conduct Term

One conduct term rounds out the glossary, and it turns on who controls the account.

• Churning: excessive trading of a customer's account by a person who controls it (through discretion), done to generate commissions for the broker while disregarding the customer's interests; a prohibited sales-conduct violation.