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CandleFocus Glossary Editor
The spot market is a financial platform where traders buy and sell financial instruments for delivery on the spot – that is, for immediate delivery and settlement. Different types of securities, such as foreign currencies, bonds, commodities, and stocks, can be traded with the spot market, and most assets quote a spot price and a future or forward price in relation to each other.
Spot market transactions can be conducted on an exchange or over-the-counter. The delivery date for most spot market trades is T+2, which means the buyer has to settle their trade within two business days. Spot markets can be contrasted with derivatives markets where the futures, forwards, and options contracts are the securities trading instruments instead of the spot market trading these financial instruments.
For currency trades, the spot market, prior to the advent of electronic trading, was an off-exchange market where participants traded the currency directly between two parties. A cash or "spot" transaction involves a two-day delivery process in which the buyer must initiate payment and the seller deliver the currency by the agreed upon date. In the futures market, standard contract sizes and delivery dates allow traders to hedge against the risk of currency fluctuations.
With the advent of electronic trading, spot market trading became more efficient as traders had access to massive global liquidity pools and reduced spreads. These electronic systems, including electronic communication networks (ECN) platform bring liquidity providers together with buyers and sellers to provide deeper markets and faster executions.
It is important to note that spot markets and derivatives markets have different rules and regulations, and must be structured differently to suit the needs of the investors. Spot markets are typically more liquid and efficient than futures or options markets, while derivatives contracts may be more flexible. Each type of market is useful in different circumstances, and investors must understand the differences and risks involved before deciding which is the best option for them.
Spot market transactions can be conducted on an exchange or over-the-counter. The delivery date for most spot market trades is T+2, which means the buyer has to settle their trade within two business days. Spot markets can be contrasted with derivatives markets where the futures, forwards, and options contracts are the securities trading instruments instead of the spot market trading these financial instruments.
For currency trades, the spot market, prior to the advent of electronic trading, was an off-exchange market where participants traded the currency directly between two parties. A cash or "spot" transaction involves a two-day delivery process in which the buyer must initiate payment and the seller deliver the currency by the agreed upon date. In the futures market, standard contract sizes and delivery dates allow traders to hedge against the risk of currency fluctuations.
With the advent of electronic trading, spot market trading became more efficient as traders had access to massive global liquidity pools and reduced spreads. These electronic systems, including electronic communication networks (ECN) platform bring liquidity providers together with buyers and sellers to provide deeper markets and faster executions.
It is important to note that spot markets and derivatives markets have different rules and regulations, and must be structured differently to suit the needs of the investors. Spot markets are typically more liquid and efficient than futures or options markets, while derivatives contracts may be more flexible. Each type of market is useful in different circumstances, and investors must understand the differences and risks involved before deciding which is the best option for them.