Trade at Settlement (TAS) is an order type in futures trading that allows participants to buy or sell eligible futures contracts at, or at a predefined differential to, the official daily settlement price for that contract. While the term "Analytical Trade at Settlement" is not standard, the underlying concept refers to the precise, rule-based execution methodology of Trade at Settlement (TAS) within the broader field of futures trading and derivatives. This mechanism provides market participants with a way to manage exposure to the closing price of a futures contract without knowing the exact price during the trading session.
What Is Trade at Settlement (TAS)?
Trade at Settlement (TAS) is an order execution methodology predominantly used in futures trading that allows market participants to execute trades at a price directly tied to the daily settlement price of a futures contract. Instead of trading at a specific, known price, a TAS order is placed at the settlement price itself, or at a predetermined number of ticks above or below it. This mechanism falls under the broader financial category of futures trading and derivatives and is designed to reduce uncertainty regarding the final settlement value of a position45, 46. Traders use TAS to gain exposure to the closing price, which is particularly useful for those who hedge their positions against an index or benchmark whose value is determined at market close.
History and Origin
The concept of standardized futures contracts dates back centuries, with formal exchanges emerging in the 18th century, such as the Dojima Rice Market in Japan, followed by the Chicago Board of Trade (CBOT) in 1848 for agricultural commodities43, 44. Over time, as markets evolved and became more sophisticated, the need for precise execution strategies around daily closing prices became apparent.
Trade at Settlement (TAS) was introduced to address specific trading needs, particularly in commodities and financial futures. For instance, TAS was first implemented for certain energy products in August 2006 by CME Group and later expanded to include precious metals and agricultural futures contracts42. Its introduction aimed to replace or augment previous "Market-on-Close" (MOC) order types, offering greater flexibility and transparency for traders looking to align their executions with the official daily settlement price41. The Commodity Futures Trading Commission (CFTC), an independent U.S. government agency established in 1974 to regulate U.S. derivatives markets, provides oversight for these trading mechanisms, promoting market integrity and protecting participants from fraud40.
Key Takeaways
- Trade at Settlement (TAS) allows market participants to trade futures contracts at a price tied to the daily settlement price, or at a small differential to it39.
- It helps reduce the uncertainty associated with executing trades at the exact closing price, which is unknown until the end of the trading session38.
- TAS orders can be placed at various increments (ticks) above, below, or precisely at the expected settlement price36, 37.
- The system facilitates efficient hedging and speculation strategies for participants whose underlying exposure is based on official settlement values.
- TAS is available on major exchanges like CME Group and Intercontinental Exchange (ICE) for a range of futures contracts34, 35.
Formula and Calculation
While Trade at Settlement (TAS) itself doesn't involve a complex mathematical formula, its execution is based on a direct relationship with the daily settlement price.
The execution price of a TAS order is determined as follows:
Where:
- Official Settlement Price: The final daily price at which an exchange settles all open positions and determines margin requirements.
- TAS Ticks: A specified number of ticks (e.g., 0, +1, -1, +2, -2, etc.) determined by the trader when placing the order32, 33. A value of "0" means the trade will execute at the exact settlement price.
- Minimum Price Increment: The smallest allowable price fluctuation for the specific futures contract, also known as a tick size.
For example, if a TAS order is placed at "TAS +1" for a contract with a minimum price increment of $0.0001, the trade would execute at the settlement price plus $0.0001.
Interpreting the Trade at Settlement (TAS)
Interpreting Trade at Settlement (TAS) involves understanding its function as a tool to mitigate price discovery uncertainty at the close of the market. When a trader places a TAS order, they are essentially agreeing to trade at the eventual daily settlement price, plus or minus a small, fixed differential. This is particularly valuable for market participants who need to offset positions or establish new ones based on an official closing benchmark, without being exposed to large price swings that might occur in the final moments of a trading session.
A TAS order at "TAS 0" or "TAS flat" signifies an intention to trade precisely at the daily settlement price31. Choosing "TAS +1" or "TAS -1" indicates a willingness to buy one tick above the settlement or sell one tick below, respectively, providing a small concession to facilitate order execution when the exact "TAS 0" counterpart is unavailable in the order book30. The interpretation revolves around managing basis risk relative to the settlement value and ensuring execution near the official close.
Hypothetical Example
Consider a grain elevator company, "Harvest Inc.," that has agreed to buy a large quantity of corn from farmers at a price pegged to the December corn futures contract settlement price on a specific date. To hedge this exposure, Harvest Inc. wants to sell an equivalent number of futures contracts at the same price the farmers receive.
On the day the price is to be determined, the December corn futures are actively trading, but the exact settlement price won't be known until the market close. To ensure they sell at the official settlement, Harvest Inc. places a Trade at Settlement (TAS) order to sell December corn futures at "TAS 0."
Simultaneously, "Feed Mill Corp." needs to buy a significant amount of corn and also wants its purchase price linked to the official settlement price for its inventory valuation. Feed Mill Corp. places a TAS order to buy December corn futures at "TAS 0."
During the trading day, these TAS orders are matched. At the end of the day, if the December corn futures contract settles at $5.50 per bushel, both Harvest Inc. and Feed Mill Corp.'s TAS orders will execute at exactly $5.50 per bushel. This allows both parties to manage their risk management effectively by aligning their trade execution with the official benchmark, irrespective of intra-day price fluctuations.
Practical Applications
Trade at Settlement (TAS) finds several practical applications across various segments of financial markets, particularly within futures trading and risk management:
- Hedging Strategies: A primary use of TAS is for hedging by market participants who have commercial exposure to a commodity or financial instrument whose value is benchmarked to the official daily settlement price29. For example, a gold producer might sell gold futures contracts via TAS to lock in a price aligned with the daily benchmark for their physical sales.
- Portfolio Balancing: Large institutional investors or commodity pool operators often use TAS to rebalance their portfolios or adjust positions at the close of the market, ensuring their adjustments are at the official closing prices28.
- Arbitrage Opportunities: While less direct, TAS can facilitate certain arbitrage strategies where traders exploit small price discrepancies between futures contracts and their underlying cash markets that are priced off the settlement27.
- Index Tracking: Funds or products that aim to track an index whose value is determined by the closing prices of its constituents can use TAS to execute their futures contracts at the most relevant price point for reconciliation26.
- Calendar Spread Trading: TAS is also applicable to calendar spread trades, allowing market participants to express price relationships between different contract months relative to their respective settlement prices24, 25.
- Regulatory Compliance: The use of TAS is regulated by authorities such as the Commodity Futures Trading Commission (CFTC) to ensure fair and orderly markets. The CFTC, established by the Commodity Futures Trading Commission Act of 1974, oversees the derivatives markets to prevent manipulation and promote transparency.23.
Limitations and Criticisms
While Trade at Settlement (TAS) offers significant benefits for specific trading strategies, it is not without limitations and criticisms.
One notable concern raised by some market participants, particularly in the energy sector, is that TAS might potentially reduce overall market liquidity in the main order book22. Critics argue that TAS trades, being assigned a price rather than actively competing in the open market, could detract from the broader price discovery process21. This stems from the idea that TAS orders don't contribute to the continuous competitive bidding and offering that typically defines a liquid market.
Furthermore, TAS has historically been associated with attempts to artificially influence daily settlement prices through manipulative practices, often referred to as "banging the close"20. This involves placing orders with the intent to impact the closing price to benefit a TAS position, rather than for legitimate trading purposes. Such actions constitute market manipulation and are illegal, leading to disciplinary actions from regulatory bodies. The Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC) have actively pursued cases related to manipulative trading practices like "spoofing," where traders place large orders with no intention of executing them, creating a false impression of supply or demand16, 17, 18, 19. While TAS itself is a legitimate order type, its design can be exploited for such nefarious activities if not properly monitored.
Despite these criticisms, exchanges and regulators implement safeguards, such as restricting TAS availability to only the most liquid commodities and contract months, to mitigate potential abuses and maintain market integrity15.
Trade at Settlement (TAS) vs. Market-on-Close (MOC) Order
Trade at Settlement (TAS) and Market-on-Close (MOC) orders are both order types designed to execute trades at or near the official closing or settlement price of a financial instrument. However, they differ in their precision and flexibility:
| Feature | Trade at Settlement (TAS) | Market-on-Close (MOC) Order |
|---|---|---|
| Execution Price | At the official settlement price or a pre-defined tick differential (e.g., TAS 0, TAS +1)14. | At the market price prevailing at or immediately before the market close13. |
| Price Certainty | High degree of certainty regarding the differential to the settlement, though the absolute settlement price is unknown when the order is placed11, 12. | No certainty about the exact execution price, as it's a market order executed at the prevailing price at close. |
| Flexibility | Allows for small, pre-defined variations from the settlement (e.g., +/- 1 or more ticks)10. | Generally executed at whatever price is available at the close, without predefined differentials. |
| Replacement/Evolution | In some markets, TAS has replaced or evolved from older MOC order types, offering more specific control over the price relationship to settlement9. | A traditional order type for executing at the close, still widely used in many markets, especially for equities. |
The key confusion often arises because both aim for an execution near the market's close. However, TAS offers more analytical control by allowing a trader to specify their desired price in direct relation to the unknown settlement price, whereas an MOC order simply guarantees execution at the closing market price, whatever it may be8.
FAQs
What types of contracts can be traded using TAS?
Trade at Settlement (TAS) is primarily used for eligible futures contracts, including those on agricultural commodities, energy products, precious metals, and certain financial instruments6, 7. Availability varies by exchange and contract.
Can I place a TAS order at any time?
TAS orders can typically be entered during the pre-open period and throughout the regular trading session up until the end of the settlement window for that specific product5. However, specific times and rules vary by exchange and contract.
How does TAS help with risk management?
TAS assists with risk management by allowing participants to reduce their exposure to price volatility during the closing period of a trading session. By trading at a price linked directly to the settlement price, traders can align their futures positions with physical or benchmarked exposures, facilitating precise hedging4.
Is TAS regulated?
Yes, trading mechanisms like TAS on U.S. exchanges are regulated by agencies such as the Commodity Futures Trading Commission (CFTC)2, 3. These regulations aim to ensure market integrity, prevent market manipulation, and promote fair trading practices.
What is "TAS 0" or "TAS flat"?
"TAS 0" or "TAS flat" refers to a Trade at Settlement (TAS) order placed with the intention to execute exactly at the official daily settlement price of the futures contract1. It indicates no desired premium or discount relative to the final settlement value.