What is Spot Trading?
Regardless of the financial instrument that’s being traded (stocks, commodities, bonds, cryptocurrencies, etc.), a spot trade happens when a seller offers an asset for a certain price that buyers are prepared to pay; the resulting transactions are settled (the seller receives payment and the asset is delivered to the buyer) immediately or “on the spot.” A spot trade can also happen in the reverse context where buyers bid for certain assets at certain prices, and holders of those assets accept those offers. The current momentary price at which the buyers and sellers are transacting with one another over a given asset is called the spot price (aka “cash price”). At any given moment, the spot price is also considered to be the going rate or market price for an asset. It’s the price you’ll pay for the asset if you want it now (or the price you’ll sell the asset for if you want to sell it now).
Order books provide some of the enabling infrastructure for spot traders to find each other. Order books electronically list unfulfilled offers to sell certain assets (in certain quantities or lot sizes) at certain prices (the “asks”) as well as unfulfilled requests to buy certain assets (also in lots) at certain prices (the “bids”). Order books are updated in real time. which makes them an excellent source for up-to-the-second pricing information as well as the trading history for the assets being traded. Such historical data can be used to discover trends. Naturally, buyers like to keep an eye on the ask-side of an order book to see how the price of a desired asset is trending. Meanwhile, sellers like to keep an eye on the bid side to make decisions about when to sell.
Order books are typically maintained by exchanges that also offer the financial infrastructure needed to automatically facilitate and complete transactions as buyers and sellers align on asset pricing and lot size. For all intents and purposes, when a buyer or seller lists the price at which they’re willing to buy or sell an asset (along with the desired lot size) they are ultimately placing an order to execute the trade with the exchange that’s hosting the order book.
Two types of orders — market orders and limit orders — fall within the definition of spot trades. A market order is an order to immediately buy or sell an asset at its current market price. A limit order is an order to buy or sell an asset when the market price reaches a specific value (aka “the limit”). The limit order amount can be a value that’s more or less than the current market price. Depending on which way a given asset’s price is trending, a limit order’s ceiling might never be reached, in which case the trader might to decide to withdraw the order altogether (at which point it also disappears from the order book).
In the world of cryptocurrency, spot trades are probably the most common type of trade and they can involve the spot trading of fiat currency for cryptocurrency as well as the spot trading of one cryptocurrency for another cryptocurrency. Cryptocurrency order books are typically organized by what’s known as trading pairs. Whereas one order book might reflect the current market pricing activity between one trading pair such as Bitcoin (BTC) and the US dollar, another order book might cover another pair of cryptocurrencies that can be traded for one another such as Ether (the native cryptocurrency of the Ethereum distributed ledger) and BTC.
Beyond an enterprise’s need to engage in spot trades to boost or shrink its cryptocurrency reserves in order to support its DLT-related business activities (paying transaction or smart contract fees, compensating employees with cryptocurrency, etc.), spot trades are relevant in terms of the evolving regulatory landscape that enterprises must pay close attention to. While spot trades are typically the purview of the US Securities and Exchange Commission (SEC), the US Commodity Futures Trading Commission (SFTC) has some limited jurisdiction over spot trades, especially in cases where those transactions involve commodities that underpin certain swaps and futures.
At the time this glossary entry was published, SEC officials believed that certain cryptocurrencies such as BTC should be considered as commodities, which in turn implies that the CFTC may have jurisdiction over those cryptocurrencies. BTC is one of a great many trading pairs being spot traded across the various cryptocurrency exchanges such as Binance and Coinbase. However, whether those spot trades qualify for the CFTC’s narrowly scoped jurisdiction over spot transactions is still undecided.
To add clarity, in August 2022, US Senators Debbie Stabenow (D, MI) and John Boozman (R, AR) of the Senate Agricultural Committee proposed the Digital Commodities Consumer Protection Act of 2022 (DCCPA), one of the provisions that would officially give the CFTC expanded jurisdiction to oversee the spot digital currency (e.g., cryptocurrency) markets. Whether or not the bill becomes law remains to be seen. But it’s a good example of the dynamic regulatory landscape that enterprises must follow if, for no other reason, they want to lay their own foundations for future blockchain law compliance.