What is a callover price?
A callover price is the price of something decided during a ring trading session. Ring trading is when traders meet in person to buy and sell things. They shout out prices until everyone agrees on a final price. This final price is called the callover price.
The callover price becomes the official price that gets reported afterwards. People use this price to know how much that thing is worth.
How callover prices work
Callover prices happen during ring trading sessions. Traders gather together in a big circle or ring. They take turns shouting out prices for what they want to buy or sell.
Other traders can shout back if they want to buy or sell at that price. They keep going back and forth, changing the price, until a price gets agreed on by everyone. No more trades happen after this. The final price they agreed on becomes the callover price.
The callover price is important because it is used as the official price. It gets reported and written down. The callover price lets everyone know the current market price for that thing.
When are callover prices used?
Callover prices are used for some types of assets. An asset is something valuable that can be bought or sold. Some common assets that use callover prices are:
Commodity futures
Commodity futures are agreements to buy or sell a certain amount of a commodity at a set price in the future. Commodities are basic goods used in commerce, like food crops, oil, and precious metals. The callover price for a commodity future is the final price agreed on for that contract during ring trading.
Financial futures
Financial futures are similar to commodity futures but are agreements based on financial instruments like stock indexes or interest rates instead of physical goods. The callover price is the final price for that financial future.
Foreign currency options
Foreign currency options give the buyer the right to buy or sell a currency at a certain price by a set date. The callover price is the price of that currency option contract after ring trading.
Importance of callover prices
Callover prices are significant for a few key reasons:
Official prices
The callover price becomes the official final price on record for that asset. It is a benchmark price used for things like marking assets to market and tracking price changes over time.
Market signals
Callover prices indicate current supply and demand. Changes in callover prices from session to session act as signals about market sentiment and price movement. Investors and analysts watch callover prices to gauge market conditions.
Clearing and settlement
Callover prices are used by clearinghouses for clearing and settling trades. The trades are finalized and the money is exchanged based on the callover price after ring trading ends. It allows trades to be completed.
History of callover prices
Callover prices and ring trading have a long history going back hundreds of years.
Origins in London
Ring trading started in the coffee houses of London in the 1700s. Traders met to buy and sell stocks and commodities. The London Stock Exchange and London Metal Exchange began with ring trading.
Open outcry system
The callover price method is part of a trading approach called open outcry. Traders use hand signals and shout to communicate. This started in the 1800s and was the main way of trading for a long time before electronic trading.
Famous trading pits
Some well-known examples of ring trading using callover prices were the trading pits at the Chicago Board of Trade, Chicago Mercantile Exchange, and New York Stock Exchange. Traders crowded around the pits, shouting and signaling. The final prices from the pits became the callover prices.
Callover prices today
Callover prices and ring trading are less common now but still happen in some places.
Shift to electronic trading
Most trading now is done electronically with computers. Electronic trading is often faster, can handle more volume, and traders can be located anywhere. Fewer assets use ring trading now compared to the past.
Examples of current use
A few places still use callover prices and ring trading for some assets. The London Metal Exchange still sets official prices for metals with ring trading. The New York Stock Exchange has a trading floor but it is more ceremonial now.
Preservation of tradition
Some people like using callover prices because it is a tradition. It can be a more physical and exciting way to trade compared to electronic trading. Even if not commonly used, the presence of callover prices preserves a connection to the history of trading.
