Mark-to-Market
The daily process where futures positions are valued at the current settlement price and unrealized P&L is converted to realized cash flow — the operational core of how futures clearing works.
What is Mark-to-Market?
Mark-to-market (MTM) is the daily process where every open futures position is revalued at the day’s settlement price. Profits and losses are realized as cash flow daily — money actually moves between trader accounts. This is fundamentally different from stocks, where unrealized gains/losses on long positions only convert to cash when you sell.
The mechanic exists because futures clearing is bilateral: every long position is matched against a short position. The exchange clearinghouse acts as the counterparty to both sides, guaranteeing each will fulfill their obligation. To maintain that guarantee, the clearinghouse needs each account to have margin sufficient to cover its current losses every day. So losses get debited from losing accounts and credited to winning accounts daily.
For typical retail traders this is invisible — their accounts just show equity changing day-to-day. But the underlying mechanic is real cash settlement: money physically moves between accounts based on each day’s price action.
How Mark-to-Market works
Daily MTM cycle for ES:
- Throughout the day: Trader is long 1 ES at 4500. Mid-day price is 4505 → unrealized P&L +$250.
- Session close (4:00 PM ET): ES settlement price determined (typically the closing index value computed from final 30-second VWAP).
- Settlement price example: Settlement = 4504.
- MTM applied: Position revalued at 4504. P&L: +4 points × $50 = +$200. Cash credited to trader account.
- Next session: Position is now “long ES at 4504” for accounting purposes. The original $4500 entry has been settled and reset.
- End of next session: If settlement is 4506 → P&L: +2 points × $50 = +$100. Cumulative since entry: +$300.
Why this matters:
- Daily realization: Profits aren’t theoretical until you close — they’re realized daily and tax-reportable as such (some countries have specific futures tax treatment reflecting this).
- Margin maintenance: Daily losses immediately reduce account equity, potentially triggering margin calls.
- No long-term holding tax advantage: Unlike stocks, you can’t “hold for long-term capital gains.” All futures profits are realized at end of each trading day.
For day traders specifically: If you close before session close, MTM is the realized P&L from your trade — no special MTM calculation. If you carry overnight, MTM happens at session close based on settlement price (not your closing chart price).
For prop firm traders: The firm handles MTM mechanics. Traders see account drawdown and position P&L. The firm reconciles MTM with the broker daily. Key impact: if you carry overnight, your account equity at session close is determined by the official settlement price, not your perceived closing price.
Worked example
Multi-day MTM walkthrough:
- Monday close: Trader buys 1 ES at 4500. Settlement price 4504. MTM: +$200.
- Tuesday close: ES settles at 4498. MTM since Monday close: -$300 (4504 → 4498 = -6 points).
- Wednesday close: ES settles at 4510. MTM since Tuesday: +$600.
- Thursday close: Trader sells 1 ES at 4509. MTM since Wednesday: -$50.
- Cumulative P&L: +$200 – $300 + $600 – $50 = +$450
- Direct calculation: Entry 4500, exit 4509 = +9 points = +$450. ✓
The two methods agree (as they must), but the MTM cash-flow timing matters: cash moved between accounts on Monday, Tuesday, Wednesday, and Thursday — not just at exit.
Implication for tax: US futures traders typically file under Section 1256 (60% long-term / 40% short-term capital gains regardless of holding period). The MTM mechanics align with this treatment — every open position at year-end is marked to market for tax purposes.
Mark-to-Market vs related concepts
Side-by-side comparison of Mark-to-Market against the most commonly confused alternatives.
| Concept | Definition | Category |
|---|---|---|
| Mark-to-Market this term | The daily process where futures positions are valued at the current settlement price and unrealized P&L is converted to realized cash flow — the operational core of how futures clearing works. | Futures Mechanics |
| Settlement Price | The official price set by an exchange at the end of each trading day, used to mark all open positions to market and determine daily P&L for futures contracts. | Futures Mechanics |
| Futures Contract | A standardized agreement to buy or sell a specific quantity of an underlying asset at a predetermined price on a specified future date — the foundational instrument of futures markets. | Futures Mechanics |
| Margin | The capital deposit required to open and hold a futures position — set by the exchange (initial margin) and broker (day-trade margin), typically 5-15% of contract notional value. | Futures Mechanics |
| Expiration | The date a futures contract terminates — at which point all open positions either physically deliver or cash-settle, depending on contract specifications. | Futures Mechanics |
Why traders fail Mark-to-Market
Confusing MTM settlement price with chart close price. Settlement is officially calculated by the exchange (typically VWAP of last 30 seconds for ES). It’s often slightly different from the visible chart “close.” For overnight carry, settlement is the number that matters, not what you saw on the chart.
Assuming MTM means “locked in profit.” MTM realizes the day’s P&L into cash, but the position continues. Tomorrow’s MTM can take it back. Don’t confuse daily MTM with closing the position.
Tax confusion. Some traders think they can “hold positions long-term” for tax advantages. Futures don’t allow this — all positions MTM at year-end. Section 1256 treatment applies regardless.
Prop firm context confusion. Prop firm drawdown calculations may use settlement prices for overnight positions, not your last-seen chart price. If you held a position into close, your account equity at next-session open reflects settlement, not your manual price observation.
Frequently asked questions about Mark-to-Market
What is mark-to-market in futures?
The daily process where every open futures position is revalued at the session's settlement price. P&L is realized as actual cash flow moving between long and short accounts daily — winners credited, losers debited. The mechanic that makes futures clearing possible.
When does mark-to-market happen?
At session close each trading day. For ES (CME equity index futures), 4:00 PM ET. Settlement price is typically calculated as the VWAP of trades in the final 30 seconds, then applied to all open positions for daily P&L realization.
How is mark-to-market different from selling a position?
MTM realizes daily P&L as cash flow but the position continues. Selling closes the position entirely. After MTM at end of day, your "long ES at 4500" position becomes "long ES at [settlement]" — same notional exposure, but P&L realized daily.
Does mark-to-market affect my taxes?
In the US, yes. Futures fall under Section 1256, which treats them as marked-to-market for tax purposes regardless of holding period. 60% of gain/loss treated as long-term, 40% as short-term. All open positions MTM at year-end for tax reporting.
Do prop firm traders see mark-to-market directly?
No — the firm handles MTM mechanics. Traders see account drawdown and position P&L. The relevant impact: overnight position equity reflects settlement prices (not your last-seen chart price), which can affect drawdown calculations the next session.