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This chapter is from the book

Trading Floor Conclusion

Futures exchanges are free markets where many different factors that influence supply and demand converge on the trading floor and through the open outcry auction market are translated into a single price. Exchanges—like the Chicago Board of Trade and Chicago Mercantile Exchange—act as barometers for price, registering the impact of the many worldwide forces on specific commodities and financial instruments being traded.

Because the same economic forces are at play in the cash and futures markets similarly, futures prices parallel the actual cash values of the commodities and financial instruments. This characteristic of futures prices allows hedgers and speculators to gauge the value of the underlying instrument in the near or distant future.

Millions of people all over the globe use the price information generated by futures exchanges to make marketing decisions—whether or not they actually participate in the futures markets. Thus, the importance of risk transference in the futures markets is also magnified as the futures markets act as a price discovery mechanism as well. By being able to access a price reference, buyers can be more competitive in their pricing of commodities, and sellers have a better reference point with which to price their goods. This translates into a more efficient market for all goods and services, and is made possible by the price discovery function of the U.S. futures markets.

Thus, the nation's futures exchanges are not only a place where risk can transferred from those wishing to avoid it (hedgers) to those willing to accept it (speculators), but they also serve a price-finding and -reporting purpose as well, allowing consumers and producers to reference a single price for most actively traded commodities.

The Least You Need to Know

  • Futures exchanges provide a centralized location for buyers and sellers to meet and, through an open outcry auction process, discover a price for a specific futures and/or options contract. The exchanges are also responsible for dis-seminating these prices and guaranteeing fulfillment of traded contracts.

  • Floor traders can be broken down into three main categories: floor brokers (who fill customer and institutional orders), private traders (locals who trade for their own accounts), and firm traders (who represent a firm for its account).

  • Buy orders are executed on the floor's bid—or the highest price the floor is willing pay. Sell orders are executed on the floor's offer—or the lowest price the floor is willing to sell a futures contract or option for. The bid is always lower than the offer. The difference is referred to as the bid/ask spread.

  • Millions of people all over the globe use the price information generated by futures exchanges to make marketing decisions—whether or not they actually participate in the futures markets. Thus the importance of risk transference in the futures markets is also magnified, as the futures markets also act as a price discovery mechanism.

  • Orders tend to go from the client to the broker, from the broker to the Exchange trading floor desk, and from the desk to the trading pit to be executed by a floor broker and sent back to the desk to be reported to the broker who informs the client. Though this process has been in place since the Civil War, it still works. Electronic order routing and online trading is changing this somewhat.

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