“Mark to Market” (MTM) or “MTM Pricing” refers to the process of an exchange setting an official settlement price of a futures asset and adjusting all market participants’ positions to reflect their profit or loss as compared to that settlement price. It is essentially a two-step process done at the end of the trading day:
- The exchange determines the asset’s settlement price. This is often different from the price at which the asset was last traded at the end of the day.
- The PnL in reference to this the settlement price is applied to the traders’ account.
Trader A enters a long position with one contract of CL at $60.00. Trader A intends to keep the position open overnight. Trader A’s account balance is $20,000.00.
MTM happens at the end of the trading day and the CME sets the settlement price at $61.00. A $1 change in this case means $1,000 profit for Trader A. His account balance closes at $21,000 for the day and the next morning, he is still in the long position at $61. The position is often marked in trading platform as “SOD”, which stands for “Start of the Day.” At the beginning of the next day Trader A’s PnL would show $0.
Trader B is shorting the ES at $2,770.00 with two contracts. Trader B intends to keep the position open overnight. The account balance is $20,000.00.
MTM happens at the end of the day and the CME sets the settlement price at $2,776.50. This is a $650 loss for Trader B, which gets applied to the account, making it $19,350.00. The next day Trader B is still in the position at $2,776.50, with an SOD-tag showing on the platform. At the beginning of the next day Trader B’s PnL would show $0.