What Is Absolute Trade at Settlement?
Absolute Trade at Settlement is a specialized order type used in futures trading that allows a market participant to buy or sell an eligible futures contract at a price precisely equal to that contract's official daily settlement price. This order type is often referred to as "TAS flat" or "TAS zero" within the broader "Trade at Settlement (TAS)" mechanism. While the general Trade at Settlement (TAS) functionality provided by exchanges allows for trades at a specified number of "ticks" (minimum price fluctuations) above or below the final settlement price, Absolute Trade at Settlement specifically targets the exact settlement value.
This capability is a significant component of derivatives markets, falling under the broader category of futures trading. It aims to reduce price volatility and facilitate efficient risk management by allowing market participants to enter positions without knowing the exact future settlement price at the time of order entry. Once an Absolute Trade at Settlement order is matched during the trading day, its price is not determined until the exchange officially calculates and publishes the day's settlement price.
History and Origin
The concept of Trade at Settlement (TAS) emerged to provide market participants with a mechanism to manage their exposure to the daily settlement price in futures markets. Prior to its widespread adoption, traders often had to wait until market close to execute trades based on the official settlement price, introducing execution uncertainty and potential slippage. TAS orders allow for execution during the trading day, significantly improving flexibility.
IntercontinentalExchange (ICE) Futures U.S. was among the pioneers in implementing Trade at Settlement capabilities. For instance, in December 2007, ICE Futures U.S. introduced TAS for its Cotton No. 2 and Frozen Concentrate Orange Juice (FCOJ-A) futures contracts, following an announcement in November of the same year. ICE Futures U.S. press release on TAS adoption This allowed market participants to transact at the yet-to-be-determined daily settlement price. The CME Group also widely adopted TAS for a broad array of their listed products, including agricultural, energy, metals, and Treasury futures, providing similar benefits to their market participants. CME Group Trading at Settlement
Key Takeaways
- Absolute Trade at Settlement is an order type allowing futures contracts to be bought or sold at the specific, yet-to-be-determined, daily settlement price.
- It is a component of the broader Trade at Settlement (TAS) mechanism, distinguished by aiming for zero deviation from the settlement price.
- The primary benefit is reducing uncertainty for traders who need to align their positions directly with the official daily settlement value.
- Trades are executed during the trading session, but the final price is assigned only after the exchange calculates the official settlement price.
Interpreting the Absolute Trade at Settlement
An Absolute Trade at Settlement order is a powerful tool for hedging and risk management strategies. When a trader places an Absolute Trade at Settlement order, they are expressing a desire to transact precisely at the market's close. This is particularly valuable for commercial entities or large institutional investors who need to align their futures positions with a forward contract price or other obligations tied to the official daily close.
The interpretation of an Absolute Trade at Settlement hinges on the idea that the specific price isn't known at the moment of the trade, but rather that the trade will occur at the definitive closing price. This allows traders to eliminate any basis risk associated with their execution versus the official settlement, which can be critical for precise position management.
Hypothetical Example
Consider a large agricultural cooperative that has entered into a forward contract with farmers to buy a significant amount of corn based on the December corn futures settlement price on a specific date. To hedge their exposure to price fluctuations, the cooperative needs to sell an equivalent amount of December corn futures at the same price their purchase from the farmers is tied to.
On the designated day, instead of waiting for the market to close and placing a market order that might execute at a price slightly different from the official settlement, the cooperative's trader places an Absolute Trade at Settlement (TAS 0) order to sell December corn futures. This order is executed during the day. Later, at the end of the trading session, the exchange calculates the official settlement price for December corn futures, say at $5.50 per bushel. The cooperative's Absolute Trade at Settlement order is then filled at precisely $5.50 per bushel, perfectly aligning their futures position with their physical contract obligation.
Practical Applications
Absolute Trade at Settlement, alongside the broader TAS functionality, is widely used across various futures markets, including those for:
- Agricultural Products: Grains (e.g., corn, soybeans), softs (e.g., coffee, sugar, cotton), and livestock. ICE Futures U.S. TAS FAQ
- Energy Futures: Crude oil, natural gas, and refined products.
- Metals Futures: Gold, silver, copper, and platinum group metals. CME Group Trading at Settlement
- Financial Futures: Equity index futures, Treasury bond futures, and interest rate futures.
This order type is particularly beneficial for institutional investors, commercial hedgers, and large market participants who require precise execution relative to the day's official closing price. It allows for the execution of large positions, including block trades, efficiently on electronic trading platforms, without directly impacting the visible bid-ask spread of the outright futures contract throughout the day. It also helps manage specific market exposures where the daily settlement price is a key benchmark.
Limitations and Criticisms
While Absolute Trade at Settlement offers significant advantages in managing settlement price risk, it's not without considerations. One key aspect is that while the order is placed and matched during the trading day, the final price is unknown until the official settlement price is determined by the exchange after the close. This means that, despite aiming for the exact settlement, the