What's the difference between a stock exchange
and a futures exchange?
At a stock exchange, the stocks bought and sold represent partial
ownership in the company, which originally issued the stock.
At a futures exchange, contracts are bought and sold. The contracts
are standardized as to quality, quantity and delivery time and
location. The only variable is price, which is "discovered"
in trading on the exchange floor. The contracts represent the
intent to accept or deliver a quantity of a commodity, for example,
corn, soybeans, or Treasury bonds, at some future date.
Why do we need futures markets?
The price you pay for goods and services depends to a great
extent on how successful businesses are in managing risk. By
using the futures market effectively, businesses can minimize
their risk, which, in turn, lowers their cost of doing business.
This savings is passed onto you, the consumer, in the form of
lower prices for food and other commodities, or a better return
on a pension or investment fund.
What does the exchanges and OTC markets
The exchanges and the OTC markets themselves do not trade
anything. They serve as a forum, or meeting place for exchange
member and credit worthy institutions to be buyers and sellers
of commodities. The traders are individual member and member
firms that seek to trade either agricultural commodities or
financial instruments for their customers or their selves.
If grain is traded at an exchange, where
is the physical commodity? (Why aren't there piles of grain
outside of the building?)
Originally, the grain was brought to the regional exchanges.
Farmers, who brought grain and livestock to the markets at a
certain time each year often found that the immediate supply
far outweighed the demand. The grain buyers, seeing such a large
supply, bid the lowest price. For an example In 1865, the Chicago
Board of Trade developed standardized agreements called futures
contracts, which are still in use today. The contracts that
are traded are for grain to be delivered at some time in the
future, say September or December at specified delivery points,
if delivery is desired. At the time the contracts are traded,
the grain is still in the fields, in grain elevators, or perhaps
not even planted. This keeps too much grain from being delivered
at the same time, therefore stabilizing prices.
What is a futures contract?
A futures contract is a binding, legal agreement to buy (take
delivery) or sell (make delivery of) a commodity. The terms
of a futures contract are standardized by type (corn, wheat,
etc.), quantity, quality, and delivery time and place. The variable
portion of the contract is the price, determined at the time
of the trade in a process called price discovery that takes
place on our trading floor.
What is an option on a futures contract?
A futures option gives the right (but does not impose an obligation)
to buy or sell a futures contract at a certain price for a limited
time. Only the seller of the option is obligated to perform.
There are two types of options: calls and puts.
What are calls and puts?
A "call" is an option that gives the option buyer the right
(without obligation) to purchase a futures contract at a certain
price on or before the expiration date of the option for a price
called the premium, determined in open outcry trading in pits
on the trading floor. A "put" is an option the gives the option
buyer the right (without obligation) to sell a futures contract
at a certain price on or before the expiration date of the option.
What is hedging and speculating?
Hedging is the practice of using the futures market for price
protection involving the offsetting of price-change risk in
any cash market position by taking an equal, but opposite position
in the futures market. For example, a farmer may use futures
or options to establish the price for his crop long before he
harvests it. Various factors affect the supply and demand for
that crop, causing prices to rise and fall over the growing
season. The farmer can watch the prices discovered in trading
at the CBOT? and, when they reflect the price he wants, will
sell futures contracts to assure him of a fixed price for his
Speculating is the practice of buying and selling futures contracts
and options to make a profit. A speculator will buy and sell
in anticipation of future price movements, but has no desire
to actually own the physical commodity. Speculators, thus, assume
market price risk and add liquidity and capital to the futures
What is the difference between a long and
short position in the market?
A short position involves selling futures contracts or purchase
of a cash commodity without offsetting an offsetting futures
transaction. (A cash commodity is an actual, physical commodity
someone is buying or selling, such as corn or soybeans, also
referred to as actuals.) A long position involves buying futures
contracts or owning the cash commodity.
What kind of economic indicators do traders
watch in the markets?
In any market, the forces of supply and demand directly influence
price. Buyers want to acquire a product at the lowest possible
price and sellers want to sell it at the highest price possible.
For agricultural commodities the various factors that affect,
causing prices to rise and fall. These factors include acreage,
crop yield, Government Farm Policy & Programs, exports and the
weather. Statistics generated from the U.S. Department of Agriculture
in its monthly crop report provide valuable information to the
CBOT® financial instruments operate on the same premise.
Suppliers of money, such as banks or thrifts, lend excess funds
at a price-the interest rate.
The level of interest rates-the price of money or credit-is
determined by supply and demand. Borrowers want to acquire at
the lowest rate possible; lenders want to maximize their interest
Government policies, business conditions, Federal Reserve actions,
and consumer saving and spending preferences are among the factors
influencing supply and demand of loanable funds and, hence,
the level of interest rates.
What is a "bull" market?
A bull market is a period of rising market prices.
What is a "bear" market?
A bear market is a period of declining market prices.
How much of what is traded actually gets
It is estimated that typically four percent or less is actually
delivered. A contract may be bought and sold many times before
the delivery date as businesses attempt to manage their risk.
This is what accounts for the large volume traded, though relatively
little is delivered, since the basic purpose of a futures contract
is to provide price-change protection. (See hedging.)
Why are the trading areas on an exchange
Because each "pit" is a raised platform with descending steps
on the inside that permit buyers and sellers to see each other.
It also allows a customer's orders to move into the "pit" quickly.
Why are the pits shaped that way?
The octagonal pit shape actually makes the trading orderly.
Each side of the octagon forms a "pie slice" in the pit. All
the traders dealing with a certain delivery month (September
for example) trade in the same slice.
Do people have assigned spots in the pits?
Yes. All the traders dealing with a certain delivery month
(September, for example) trade in the same "pie slice"-shaped
section of a pit. In addition, brokers, who work for institutions
and/or the general public stand at the edges of the pit. From
this position, they can easily see other traders and have easy
access to their runners (who bring orders from phone booths).
The locals, who trade only for themselves, stand in the center
of the pit.
Why do traders wear colored jackets?
Exchange rules dictate that personnel on the trading floor
must wear jackets and ties, but business attire is not tailored
to the physical demands of the trading pit. So the trading jacket
was developed as a lightweight, loose-fitting alternative in
which a trader may move more freely.
Some member brokerage firms have large floor staffs. In practice,
all the staff from the same brokerage firm wears the same color
jackets, which sometimes also bear the company name or logo,
in much the same manner that sports teams wear uniforms. This
helps the staff find each other on the crowded trading floor.
The jackets also help for easy recognition during active trading.
Independent traders often wear trading jackets in colors of
their own choosing or they sometimes wear the same color of
jacket as that of the member firm that clears their trades.
Why do traders shout and use hand signals?
Trading is conducted through a public auction system. There
is no central auctioneer; each trader plays that role for himself.
Through open outcry, the trader shouts the quantity of the commodity
he is buying or selling, and the corresponding price he wants.
The hand signals are a specialized sign language, which clarifies
the traders verbal, bids and offers, particularly when trading
is highly active.
What do the hand signals mean?
A trader with his palm facing inward signals a wish to buy;
one with his palm outward signals a wish to sell. Each finger
held vertically indicates quantity. Fingers extended horizontally
express the price at which the bid or offer is made.
Why not trade by computer?
In 1994, the CBOT® launched Project A®, an electronic
trading system, and most recenlty, in August 2000, the CBOT®
replaced Project A® with a/c/e (Alliance/CBOT®/Eurex).
The a/c/e platform is used to expand trading time after the
close of the traditional open outcry trading hours to offer
our members, member firms and customers additional trading opportunities.
The a/c/e platform had a volume of more than 280,000 contracts
during its first week of operation.
The open outcry is the primary market. The open outcry method
lends more liquidity to the market because of the number of
trades involved and the ability to negotiate price face to face.
To negotiate price by computer each trader has to type in a
price, then wait for a reply. In the world markets Traders and
Introducing Brokers use both methods according to the best interest
What is a broker? A local?
A broker is a company or an individual who executes futures
and options orders for financial and commercial institutions
and/or the general public. A local is an individual who trades
How is the customer's investment protected?
Protecting the interests of all participants in the futures
market is the responsibility of all exchange and industry members,
as well as federal regulators. Working in concert, they work
to maintain an honest, open trading environment for all market
Rules and regulations of the each exchange are extensive and
are designed to support competitive, efficient, liquid markets.
These rules and regulations are scrutinized continuously by
the exchanges, and are periodically amended to reflect the needs
of market users.
Disclaimer and Important Risk Warning:
You should understand that trading in the futures
and or options markets is not for everyone. There is substantial risk
of loss when trading futures and or options. Carefully evaluate whether
trading in the futures and or options markets is appropriate, as such
trading is speculative in nature. When trading futures, you may sustain
losses which exceed your margin deposits. Purchasing options may result
in the entire loss of premiums paid for such options. Options sellers
should understand that they may be at risk of assuming a long futures
position in the case of selling a put or a short futures position
in the case of selling a call from the respective strike prices of
such options. Past results are not necessarily indicative of future