“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.