What Is a Call Rule?

Jim B.

The call rule is a law that binds the commodities exchange market stating that the price of a commodity at the start of the trading day should be similar to irs price at the end of the preceding day. This prevents the price of a commodity from being skewed by after-hours trading, ensuring solid competition on the open market. In the United States, the call rule was established by the Supreme Court in a 1918 decision. With this rule in place, traders can be assured that the opening price of a commodity will hew very closely to the closing price of the day before.

A 1918 decision by the Supreme Court established the call rule in the United States.
A 1918 decision by the Supreme Court established the call rule in the United States.

Commodities are the driving force behind the futures market, in which traders lock in prices for physical products to be delivered at some point in the future. There was a time when this market was dominated by powerful entities that could move market prices for specific commodities with trading in the hours when the open market was closed. The call rule eliminated much of the impact of this after-hours trading.

What the call rule ensures is that the closing price on one day of a specific commodity and the opening price the following day are just about the same. This means that any traders who wish to buy or sell a commodity on the futures market after hours must abide by the price that has been set. It decreases the volatility in the market, helping to ensure that traders without any special connections have the same competitive advantage as anyone else.

In the time before the call rule was instituted, certain major players in the market could affect commodities prices by buying after hours. They would be offered favorable prices that were better than the ones given to those buying commodities during the day. As a result, the supply and demand balance would be upset, thereby changing prices overnight. The new prices would force regular traders to pay a premium for what the after-hours traders received at a discount.

This practice was suspended when the Chicago Board of Trade enacted a call rule in 1906. The United States Supreme Court ultimately received the case in 1918, and they ruled in the favor of the Board and upheld the rule. In the ruling, the justices found that the rule was indeed competitive and it upheld the so-called "rule of reason," which essentially maintains that specific circumstances surrounding certain aspects of trade should be the driving force behind any restrictions placed on that trade.

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