Call Rule

The call rule is a rule created for markets trading stocks or other cash commodities whereby the official bidding price for a cash commodity is competitively established at the end of each trading day and held until the opening of the exchange the following trading day. This exchange rule works for fairness for all trading parties and creates order for the market.

The call rule is an important rule for creating order and a fair playing field for traders of cash commodities, such as stocks, bonds and other commodities. The call rule sets the official opening price of a given traded cash commodity equal to the closing price of that commodity the previous day. The call rule attempts to reduce overnight volatility by ensuring commodity prices begin trading near the previous day's closing bid. The call rule is such an ingrained part of common trading practices that it would seem to have been in effect from the beginning of modern trade markets, but this is not the case.

The call rule was established as a required common practice when the Chicago Board of Trade (CBOT) adopted it in 1906. Before that, the Commodity Futures Trading Commission (CFTC) was using it as a way of keeping order and preventing off-the-books trades after hours that disrupted the market and caused confusion. Before the CFTC began using the call rule, it was common for traders to make trades after the official closing time of the market each day and before it opened the next morning. This was both unfair for those who did not have access to these unofficial trades and chaotic for the market itself. There was no way to know exactly how much a traded commodity should be priced to start trading the next day.

In 1913, the United States Department of Justice, known as DOJ, filed a suit in federal court against the CBOT for price-fixing. The DOJ claimed that the fact that the CBOT set the starting price for a commodity as the same number as the previous day’s closing price was a form of price-fixing that was illegal under antitrust law. In 1918 the case went to the Supreme Court as Chicago Board of Trade v. United States, 246 U.S. 231 (1918). The court ruled unanimously that the call rule was not an example of price fixing and did not violate antitrust laws. The determining factor was, according to the court, whether a rule merely regulated and promoted competition, or whether it prevented competition. Since the call rule promoted competition and merely imposed a transparent pricing system, it was allowed to stand.