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This chapter is from the book

Order Flow from Customer to Pit

The open outcry auction market of the futures exchanges is an efficient system where prices are discovered and transmitted to the outside world through the interaction of many different individuals.

The perimeter of most U.S. futures exchanges is flanked with long desks covered with computer terminals and rows of telephones. These trading desks are staffed by member firms, which act as order-taking and informational portals for the markets.


Many traders are tempted at the very beginning of trading to use electronic order placement via the Internet. Because a simple error can cost you thousands of dollars, beginning traders should consider a reputable full service broker until they get their feet wet. The extra money you pay in commissions is small compared to what you could lose if you place an order wrong yourself. But, after you are comfortable with order placing, use whatever system you wish.

Assume Farmer Brown is growing corn. Seeing the price of Corn at $2.15 for May delivery, Farmer Brown decides he wishes to sell 5,000 bushels of his corn in storage to finance his planting efforts in March. Farmer Brown calls his broker, Mark at Great Pacific Trading Company (GPTC). Mark writes down Farmer Brown's order to sell one contract of May Corn (5,000 bushels) at $2.15 per bushel or better, checks to make sure that Farmer Brown has sufficient funds (initial margin), and quickly hands the order to his firm's central order desk. The order desk inputs this "ticket" (industry jargon for an order) into its computer system, which is hooked up to a computer system on the Chicago Board of Trade, where Corn futures are traded.

The order to sell one contract (5,000 bushels) of May Corn is printed out at GPTC's clearing firm's booth on the Chicago Board of Trade. The order is taken from the printer, handed to the "runner" who quickly brings the order to the floor broker in the Corn pit. The floor broker assesses the current price of Corn, seeing that May Corn is $2.15 bid and $2.151/2 offer, he sells one contract to trader D at $2.15, writes up the trade on a ticket, which is handed back to the runner who brings it back to his desk. The trade is punched back into the computer as "Selling 1 May Corn at 2.15" and sent back to GPTC. The GPTC order desk writes this up and hands the order back to Mark, who calls Farmer Brown up on the telephone, telling him he sold one contract of May Corn at 215.

The amount of time the order spent at GPTC was probably less than two minutes. After spending two minutes at GPTC, the order is on the floor, and in the pit in another two minutes, before the floor broker executes it. Usually about five minutes will pass in between the order being filled and the runner bringing it back to the desk. So within 10 minutes, the order is executed and reported back to the brokerage firm. Mark will call his client back immediately, and the entire process can take place in about 12 minutes.

In other pits, like Treasury Bonds or the Stock Indexes, orders are "flashed" into the trading pit using a complex set of hand signals from the clearing firm desk, and orders can be executed and reported back to the order desk in one to two minutes.

In the fledgling electronic markets, like the Chicago Mercantile Exchanges E-Mini S&P Stock Index Futures, orders can be filled and reported back using the computers in less than 30 seconds.

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