Call Rule - Explained
What is the Call Rule?
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What is the Call Rule?
An important rule in trading markets that achieve fairness and orderliness in trades is the call rule. The call rule is used in the stock market or trading or cash commodities. This rule holds that the official bidding or opening price for a given stock or commodity for a particular day is the same as the closing price for the commodity in the previous day. In a similar vein, the official price for a particular commodity is fixed at the end of each trading day. The price set at the close of each day is upheld as the opening price for the next day before another price is set.
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How Does the Call Rule Work?
The major objective of the call rule is to establish fairness for all trading parties in a sales arrangement. It is also to maintain sanity and orderliness in the trade market. Traders of stocks, bonds, cash commodities and other types of trading instruments abide by the call rule. Both the opening price at which commodities are traded for a particular day and their closing price are established using the call rule. Basically, the opening price for a new day must be the same as the closing price of the previous day. Aside from maintaining orderliness in the market, the call rule prevents sudden changes to prices of commodities such as overnight volatility. The call rule was adopted by the Chicago Board of Trade (CBOT) in 1906. It was established as a practice in the trading market to install orderliness and fairness in the market. Before the call rule was fully adopted, traders often engage in unofficial trade and this is regarded as unofficial to traders that do not have access to trade of this nature. The trade is unofficial in the sense that they make trades after official closing time and before the opening time for the next day. After the call rule was adopted, a suit was filed against CBOT by the United States Department of Justice, stating that price-fixing is an illegal act. This happened in 1913. The case was transferred to the Supreme Court and the court established that the call rule is not price fixing and it violates no antitrust law.