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THE TRADING PROCESS

Once you’ve made your trading decision, you would then contract you futures broker. After you give your broker the buy or sell order, it is transmitted directly to the trading floor via telephone or data transmission lines. Upon receipt, the order is time-stamped and delivered to the trading area, or pit, by an order clerk or runner. (If you’re trading on GLOBEX, your order would be entered into a Globex terminal. If your order is matched, it is confirmed to your broker and then to you. To ensure fairness, the Globex system processed all orders based on price and time priority.)

The trading pits are each divided into a number of sections designated for trading in particular contract months. No trading may occur outside a contract’s assigned pit, nor is trading permitted at any time other than during those hours which have been designated by the Exchange.

THE TRADING FLOOR

The trading floor of each commodity exchange is the scene of the open outcry auction through which contracts are traded. While the size, arrangement, and facilities of the trading floor vary among the exchanges, certain features are common to all.

Futures trading is conducted in octagonal and polygonal pits or rings, with steps descending to the center of each pit. Generally, one pit is devoted to each commodity traded on the exchange. Traders stand in groups on the steps or in the center of the pit or around the waist-high ring according to the contract month of the commodity which they are trading.

Adjacent to the pit are market reporters who are employed by the exchange to record price changes as they occur. The prices they record are displayed on computer-operated electronic display boards. Pertinent prices on other commodity exchanges are also displayed. Traders in the pits can keep informed about price movements on their own and other exchanges by glancing at these boards.

Orders are received on the floor by telephone or electronic order entry systems (TOPS) by the member firms who handle their own and customer accounts. These banks of telephone and order entry systems are located close to the pits. Orders are rushed by runners from the individual receiving the orders for each member firm to traders in the pits.

FLOOR BROKER TYPES AND RESPONSIBILITIES

An individual floor broker or trader is responsible for executing you order in the trading pit. Floor brokers are licensed by an agency of the federal government to execute trades for the public.

Floor traders fall into these general classification:

(1) Floor Brokers, who fill orders for commission houses and commercial interests, producers, processors, importers, manufactures and exporters who use the market to limit price risk;

(2) Speculators, who buy and sell for their own account, either as day traders who initiate and offset their positions in the course of one day’s trading session, or as position traders who hold long or short positions over a period of days or weeks;

(3) Scalpers, who trade for small, short-term profits during the course of each trading session, rarely carrying a position overnight.

All these types of floor traders compete in the auction for sales and purchases of futures contracts. The day traders and scalpers, especially, help to create market liquidity and to minimize price fluctuations.

THE AUCTION

Offers to buy or sell are made by open outcry auction so that any trader in the pit who wishes to take the opposite side of the trade may do so. In addition to making their bids and offers vocally, pit traders also use a simple but highly efficient set of hand and finger signals. The position of the hand tells whether a trader is buying or selling.

Buys Sells Filled.

Each trader lists all his completed transactions on a trading card or multi-part order form. These trading cards constitute original records, and from them the essential data is transferred to the offices of the clearing firms involved. Technical performance of trading obligations is assumed by the clearinghouse.

ORDER TYPES

There’s lots of variety in the instructions you can give to the floor broker to help you get exactly the type of order execution you want. You may wish to rely on your broker for expert advice as to which instruction you should use in a particular market situation.

Market Order (MKT): An order to be executed immediately at the current market price. Use this type of order when you want to make your trade at the best available price upon receipt by the floor broker. You don’t specify a price; rather you say Buy or Sell "At the Market".

Limit Order (O.B. - Or Better): An order that can be executed only at a specified price or better. Use this type of order when you want to be filled only at a specified price or better. A Buy Limit Order is placed at or below the current market price, while a Sell Limit Order is placed at or above the current market price.

Stop Order: An order that becomes a market order only when the market trades at or through your specified price.

You may have heard the stop order referred to as a "Stop Loss", referring to an acknowledgment that your are wrong and want to get out of the market before it moves any further against you. While this analogy can help you remember to place Buy Stops above and Sell Stops below the current price, the term "Stop Loss" is actually something of a misnomer. Although Stops have historically been used to exit a position when it has reached a certain point against you, the Stop is also commonly used to protect profits or even to enter new positions, "Stop Entry" order.

Spread Order: An order to simultaneously buy and sell at least two different contracts at a quoted differential; sometimes three or more "legs" are involved.

Day Order: A order that automatically expires if it is not executed on the day it is entered.

Open Order: An order that remains in force until it is filled, canceled or until the contract expires. Also called a "Good-til-Canceled" order.

Market If Touched Order (MIT): Use this order to make sure you get filled if the market hits you price. If becomes a Market Order when the market hits you specified price. As with all market orders, you will be filled at the best prevailing price when your MIT is elected; thus, you will be filled, although not necessarily at you stipulated price. As with a Limit Order, a Buy MIT is placed below the current market price, while a Sell MIT is placed above the current market price.

Stop Close Only Order (SCO): This is the type of order to use if you want your Stop to be filled only if elected in the Closing Range. Since they may not be filled until the Closing Range, the price you stipulate may be anywhere in relation to the current market. They are, however, elected in the same fashion as regular Stops, the difference being that Stop Close Only orders must be elected and filled during the Closing Range of trading. This is usually the last 30 to 60 seconds of trading.

Market On Close Orders (MOC): Use this type of order if you want to be filled at any time during the Closing Range. This is usually the last 30 to 60 seconds of trading. To place this type of order, just say "MOC" or "Market On Close" instead of a price.

Order Cancels Order (OCO): This type of order actually gives two alternative instructions on the same order in which the execution of either one automatically cancels the other. Buy and/or Sell instruction cannot be combined.

For example, suppose you are long one December Swiss Franc at 7550. You want to get out of the market if it declines to 7495, but you want to take profit at 7650. The broker will fill whichever portion of your order he is able to first, simultaneously canceling the other portion.

Please bear in mind that every Exchange has its own rules and that any type of order which a given exchange chooses to accept will be executed in accordance with the rules of that Exchange. Further, not every type of order is accepted at every Exchange. Also consider the liquidity of the market you are trading. A certain amount of discretion is inherent in various order types, and you may be filled unfavorably if you’re in a thin (illiquid) market. Likewise, if you have an order in the pit before the opening, realize that the market may open through your price by a significant amount and a fill (usually within the opening range) will result.

TRACKING YOUR TRADES

"What’s the current price?" is the first and most important question you need to answer when you’re trading. Price information is available from us, Futures Technology, when you call your broker.

CONTRACT MONTHS

A contact month identifies the month and year in which the futures or options contract ceases to exist. It is also known as the "Delivery Month". All futures contracts are ultimately settled either by liquidation through offsetting purchases or sales, or delivery of the physical commodity against the contract. The vast majority of futures contracts are settled by offset. Only one to three percent of all futures contracts result in delivery of the actual commodity. Yet the fact that buyers and sellers can take or make delivery is essential to the functions of the futures markets. The ability to make or take delivery of the actual commodity assures the futures prices will reflect the actual cash value of the commodity.

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The Rules and Regulations of the different Commodity Exchange should be consulted as the authoritative source for information, rules and contract specifications.

PLEASE NOTE THAT THERE IS AN INHERENT RISK OF LOSS ASSOCIATED WITH TRADING FUTURES AND OPTIONS CONTRACTS. EMPLOYEES OF FUTURES TECHNOLOGY, LLC PROVIDE INFORMATION BASED ON SOURCES WE CONSIDER RELIABLE, BUT THERE IS NO GUARANTEE THAT THE INFORMATION WE PROVIDE WILL RESULT IN PROFITABLE TRADES. PLEASE CAREFULLY CONSIDER YOUR FINANCIAL CONDITION BEFORE INVESTING IN FUTURES AND OPTIONS CONTRACTS.  FUTURES TRADING IS NOT SUITABLE FOR ALL INVESTORS.

PAST PERFORMANCE IS NOT NECESSARY INDICATIVE OF FUTURE RESULTS.

This Site is Designed, Built and Maintained by Jerry Hodges
Copyright © Futures Technology 2008, All rights reserved.
Revised: 22 February, 2008