A spot market is a market in which financial assets or goods are traded for immediate delivery, with payment and transfer of ownership taking place straight away or within a short, standard settlement period. The price agreed is the current market price, known as the spot price. Spot markets exist for currencies, commodities such as oil and gold, company shares and cryptocurrencies, and they are used by companies, banks, investment funds and individuals.
The spot market is usually contrasted with markets for future delivery, in which buyers and sellers agree a price today but exchange the asset later. These include forward contracts, futures contracts and options, which together make up the derivatives market. Spot markets are also called cash markets or physical markets, because the actual asset changes hands.
The spot market in plain terms
A spot market works like a farmers' market. You see the price of apples on the stall, you pay, and you walk away with the apples. The deal is done there and then, and the price is whatever the stallholder is asking that morning.
The alternative is to agree with a farmer in spring to buy a set amount of apples in autumn at a price fixed today. That is a forward or futures deal, used by people who want certainty about future prices. In the spot market, by contrast, nobody is promising anything for later: you trade at today's price and receive what you bought straight away, or within a day or two for markets that need time to process paperwork.
How spot markets work
Spot trading takes place on organized venues, such as a stock exchange or a crypto exchange, and in over-the-counter markets where dealers trade directly with clients. On exchanges, buy and sell orders meet in an order book, and each trade sets a new spot price through price discovery.
"Immediate" delivery has different meanings by market, defined by each market's settlement period:
- Foreign exchange. In the foreign exchange market, a spot deal in most currency pairs settles two business days after the trade, although some pairs settle in one day. The price is the spot rate.
- Shares. US stock trades moved to settlement one business day after the trade in May 2024, and several other markets have followed or plan to.
- Commodities. Physical commodities may require delivery, inspection and transport, so spot deals for goods such as oil cargoes can take longer to complete.
- Crypto. On a centralized exchange, a spot trade updates the exchange's internal records instantly. On a decentralized exchange, the trade settles on the blockchain when the transaction is confirmed.
Spot markets and derivatives
Spot and derivatives markets are closely linked. The price of a futures contract usually reflects the spot price adjusted for interest costs, storage and expected income until the delivery date. When futures trade above spot, the market is said to be in contango; when they trade below, it is in backwardation. Traders exploit gaps between the two in arbitrage strategies, which pull prices back together.
In crypto, perpetual futures without an expiry date dominate trading volumes on many exchanges, and their prices are tied to the spot market by periodic funding payments. Exchange-traded products can also be linked to the spot market. In January 2024 the US Securities and Exchange Commission approved the first spot bitcoin ETFs, which hold actual bitcoin rather than futures contracts.
Who uses spot markets
Spot markets serve very different users. Importers and exporters buy and sell foreign currency on the spot market to pay suppliers or bring revenue home. Manufacturers, airlines and utilities buy fuel, metals and power at spot prices when they have not fixed costs in advance. Central banks sometimes intervene in the spot currency market to steady their exchange rate. Investors use spot equity and bond markets to build portfolios, while crypto users buy coins on spot venues to hold, spend or move into self-custody. Spot prices also serve as reference points: many derivatives, indices and loan agreements are settled against a published spot price, so the quality of spot price formation matters well beyond the market itself.
Advantages and limitations
Spot markets are simple: buyers get the asset, pay its full price and face no expiry dates or margin calls when they trade without borrowing. Prices are generally transparent on major venues. For businesses, the spot market is the natural place to buy currency or raw materials needed now.
The main limitation is exposure to price changes. A company that buys foreign currency on the spot market each month cannot fix its future costs, which is why many combine spot purchases with hedging through forwards or futures. Spot markets in smaller assets can be thin, so large orders move the price and suffer from slippage. In crypto, spot prices can also differ between exchanges, and some venues have been accused of inflated volumes, so traders often compare several sources. Settlement periods, even short ones, carry settlement risk that one side fails to deliver.