Contract sizes and lots

Every trading platform asks for a quantity before it will accept an order, and the box is almost never labelled in money. It is labelled in lots, or in contracts, or simply in volume, and the number typed into it is a multiplier applied to a standardised quantity of the underlying market. That standardised quantity is the contract size, and it is a published specification of the instrument rather than a setting on the account. Two positions of the same lot number in two different instruments can carry exposure that differs by a factor of a thousand, entirely because the contract sizes behind them differ.

Why the unit is standardised at all 

Standardised quantities are inherited from the wholesale markets that CFD prices reference. The interbank currency market deals in round amounts of the base currency, futures exchanges list contracts covering a fixed number of barrels, bushels or ounces, and equity markets deal in whole shares. A retail contract that referenced an arbitrary quantity would have to be priced from first principles every time; a contract that references a conventional quantity can be priced, cleared and hedged against instruments that already exist. The convention is not a broker invention, and it survives because it is what the layer above trades in.

The word lot descends from the same wholesale practice, and it is a unit of the underlying, never a unit of money. A lot of a currency pair is a quantity of the base currency. A lot of a share contract is a number of shares. A lot of an index contract is a money amount per index point. Reading the word as though it meant a fixed sum of capital is the most common error made with it, and it is the root of most sizing surprises.

The conventions, asset class by asset class 

Four conventions cover almost everything a retail CFD account can open, and each one answers the same question in a different unit.

• Currency pairs. A standard lot is one hundred thousand units of the base currency, the first currency named in the pair. A mini lot is one tenth of that and a micro lot one hundredth. Because the unit is the base currency, the notional value of a position in a pair quoted against the US dollar moves with the exchange rate, while its base currency amount does not.
• Metals and energies. Gold and silver are conventionally written in troy ounces per lot and crude oil in barrels per lot, with the exact quantity published per instrument. These follow the futures contracts they reference rather than a single industry standard, so the specification matters more here than anywhere else.
• Index contracts. Size is expressed as a money amount per index point, so a contract covering a stated amount per point turns a movement in the index directly into a movement in the account currency without any further conversion step.
• Share and exchange traded fund contracts. Size is a number of shares or units, most often one share to one contract, which is why a share contract in a company trading at a high price carries far more notional value per contract than one trading at a low price.

The published specification for each instrument states its contract size, its minimum order quantity and the increment between permitted quantities. Those three numbers together define what can actually be submitted, and they are the reason an order for a size that looks reasonable is sometimes rejected before it reaches the market at all.

How size turns a price move into money 

The chain is short and it is the same in every market. Lots multiplied by contract size gives units of the underlying. Units multiplied by the price gives the notional value of the position. Units multiplied by the price change gives the money result. Nothing else enters that calculation, and no step in it depends on how much money is in the account.

One volume number produced results three orders of magnitude apart, and the only thing that changed was the contract size. That is the whole reason contract specifications exist as a document rather than a footnote, and it is why exposure is measured in notional value rather than in lots when positions across different markets are compared to each other.

Fractional lots and minimum increments 

Retail platforms accept fractions of a lot, which is what makes the standardised unit workable for accounts far smaller than the wholesale market it was built for. The fraction is not unlimited. Each instrument publishes a minimum volume and a step, and an order has to be a whole multiple of the step at or above the minimum. A platform that rejects a quantity falling between two steps is applying that rule, not failing.

The step also sets the resolution of any sizing calculation. Where a step is a hundredth of a lot, exposure can only be adjusted in increments of one hundredth of the contract size, and a calculation that produces a quantity between two permitted steps has to resolve to one of them. On instruments with large contract sizes that rounding is itself a meaningful amount of exposure, which is a fact about the instrument rather than about the calculation.

Notional value is not what has to be funded 

Contract size determines notional value, and notional value determines two separate things that are easily conflated. It determines the money result of any price move, because the difference settles on the whole contract. It also determines the margin requirement, because the requirement is a percentage of the notional value. The first is unbounded by the account balance and the second is not.

The practical consequence is that the funded amount and the exposed amount are different numbers with a fixed relationship, and only one of them appears in the volume box. A position whose margin requirement is comfortably covered can still carry notional value many times the balance behind it, because that is the arithmetic of a percentage requirement rather than an unusual condition.