Settlement Prices

Why End Of Day Settlement isn't Always The Last Trade

Settlement price is the price at which a contract is settled at the end of the trading day. With stocks this is the last trade of the day. However, with commodities the last trade does not have to be the settlement price. This is important because margin determinations are based on the settlement price.

The exchanges have a settlement committee for each commodity which meet immediately after closing to make sure the last trade fairly represents the value for that commodity. Usually it does but if not, a new price will be established. Actively traded contracts have relatively stable pricing and the last trade normaly reflects the fair value.

Settlement price becomes more difficult for a thinly traded issue which may have last traded 3 or 4 hours before the close. A complicating issue which could arise might be a significant news story which came out shortly before the close of trading and which has a significant impact of the price of that particular commodity. The settlement committee will now perform an important function. They are going to try to determine a price for that particular commodity which fairly represents its value in light of the news story which just broke. They may have a lot of information or very little information to make this determination. They may be able to look at the spread between different months or this may be of no use to them. Whatever the case, they must determine a price which fairly represents the value of that contract(s) given the new circumstances.

Abridged from an article by Charles J. Kaplan

Futures Info

PLEASE NOTE THAT THERE IS AN INHERENT RISK OF LOSS ASSOCIATED WITH TRADING FUTURES AND OPTIONS CONTRACTS. FUTURE TRADING IS NOT SUITABLE FOR ALL INVESTORS.