What is the futures trading pit?
That's where it all happens. Futures contracts are traded in
trading pits at Exchanges all over the world. That's where traders
determine futures prices, which change from minute to minute as
trading goes on.
The highest bid or lowest offer (the most competitive price) sets
the true market value. A trader must "best" or beat that price in
order to set a new "best" bid or offer. The seemingly frantic nature
of the open outcry system is really about brokers and traders
constantly bidding or offering prices that the market will perceive as
the true value; and trades will then occur.
A futures contract is an agreement to buy or sell a commodity at a
date in the future. Everything about a futures contract is
standardized except its price. All of the terms under which the
commodity, service or financial instrument is to be transferred are
established before active trading begins, no neither side is hampered
by ambiguity. The price for a futures contract is what's determined
in the trading pit of a futures exchange.
Hand signals, as well as vocal open outcry, relay quantity and
price information between traders and brokers across the pit. As in
any auction situation, a trader's action or word is a bond. With
billions of dollars at stake, each action in the pits is actually a
carefully recorded and executed trade agreement. Though seemingly
chaotic, what you are witnessing in a futures trading pit are market
professionals conducting business at lightning speed for either
customer or for personal profit. In markets where prices move rapidly
within short periods of time, the speed of trade execution and timely
delivery of orders to customers is essential.
Different colored jackets help to identify all the people on the
trading floor. Here's how the CME identifies who's who:
Red jackets are worn by members or brokers who trade in the pits.
A floor broker refers to an Exchange member who executes orders for
the accounts of one or more clearing member and their customers. A
local or floor trader is a member who executes trades for his own
account or for a clearing firm account.
Runners and phone clerks wear gold jackets. They are employees of
the brokerage firm members or individual members. A runner's
responsibility is to get the customer's order to the appropriate
broker in the correct pit as soon as possible. Filled orders need to
also be returned to the firm's desk for confirmation to the customer.
The runner's job is an important one because it provides the vital
link between the customer and the execution of his order by the broker
in the trading pit.
Agricultural Commodity Futures
The first type of futures contracts is made up of agricultural
futures. A few examples of modern futures contracts are Feeder
Cattle, Corn, Wheat, Lean Hogs and Cotton.
Financial Futures
A number of foreign currency futures are traded at the CME.
Currency futures are quoted as U.S. Dollars against the currency.
That tells you the number of dollars it takes to buy one unit of
foreign currency. The CBOT and the CME trade interest rate futures
such as the 30 Year Bond, Eurodollars, 3 Month T-bills and 10 Year
Notes to name a few.
Equity Index Futures
The third type of futures contracts is made up of equity Index
futures. One example is the Standard & Poor's 500 Stock Index futures
contract. The actual S&P Stock Index futures contract. The actual
S&P Stock Index is based on 500 companies, about 80% of the value of
all the stocks listed on the New York Stock Exchange. The CME's and
CBOT's E-Mini S&P, Dow Futures and E-mini Nasdaq contracts have become
very popular the last few years. People can use these indexes to
trade for profit or to protect stock investments. These contracts are
cash-settled and no individual stocks are ever transferred.
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