As the name suggests, a futures exchange is a facility in which buyers and sellers can trade a wide range of commodities futures, index futures, and options on future contracts. All members of the exchange are permitted access to the exchange, including brokers and commercial traders that are members of the exchange. A member of the National Futures Association (NFA) and a member of the Commodity Futures Trading Commission (CFTC) must register with the respective organizations. The first step for anyone who wants to trade futures contracts is to set up an account with a broker who is registered with the SEC. In addition to clearing and settlement, futures exchanges offer other services. Check out companyfutures.org for more detail.
- The futures exchange allows people who wish to trade commodities to quickly locate each other and trade safely.
- Individuals and firms can only access the exchange if they are members.
- Brokerage firms that are members of the exchange must be used by individuals who wish to trade.
- Clearing services are also provided by exchanges.
Futures Exchanges: How They Work
Standardizing and promoting futures trading is the function of a futures exchange. In general, those who run the exchange are motivated by the quantity and dollar value of trades, so the more, the better. Basically, they want to make as many trades as possible by bringing in as many participants as possible. As a result, many innovations have occurred in recent years, encouraging a greater use of electronic networks.
While futures exchanges still have significant physical presences, such as the trading floors in the Chicago Mercantile Exchange (CME) or New York Mercantile Exchange (NYMEX), these locations no longer hold the same significance they once held. Trading takes place around the world nearly 24 hours a day during the week since traders are able to conduct transactions from their computers through the internet.
Traders of futures on futures exchanges have the certainty of how much they will receive for their underlying commodities at the market. In the meantime, the exchange will provide consumers or buyers with the certainty of a price at a defined future time.
A standardized size, expiration date, and strike price are established for contracts on an exchange so as to promote as much participation as possible. Comparatively to over-the-counter (OTC) contracts, where buyers and sellers come to an agreement based on their own preferences.
Also provided by exchanges is pricing information, which is disseminated by information vendors. Sharing information promotes transparency and fairness in business. All interested institutions and individuals have equal access to pricing information, including price, bids, and offers.
The exchange offers clearing services as well, which is another very important feature. The exchange standardizes the charge and performance of clearing, while a variety of firms provide the service. In the case of clearing services, participants are assured that their trade counterparties will meet their contractual obligations. Short-term speculators find trading on the futures market to be a simple proposition and are motivated to participate.