Futures are agreements to trade things like oil, gold or stocks at a set price in the future. Only certain people can trade directly on these hubs. They’re called members and are brokers and big traders.
If you want to trade futures you’ll need to go through a broker who’s a member of the hub. The hub makes sure trades happen smoothly and safely. It also does the paperwork and money transfers after trades are done.
Key Points
- Traders can find each other and trade safely on the hub
- Only members can trade directly on the hub
- You’ll need a broker if you’re not a member
- The hub does the trade details and money moves
How Futures Markets Work
Futures markets are where you can trade contracts for future delivery of goods or financial assets. They serve two purposes: risk management and speculation. Companies use futures to hedge against price changes that could hurt their business. Traders try to make money by guessing future price moves.
Trading has grown a lot lately. More futures are available now, including weather, freight costs and even yes/no questions about asset values. Most trading happens online through exchange networks not in person like before.
Daily Contract Volume
Futures exchanges see many contracts traded daily. For example one major exchange averaged over 200,000 contracts traded daily in 2024. This high volume creates a liquid market where prices reflect current views on future values.
Exchanges make money based on volume. They want more trading to happen. But they also want to keep the market fair and not too wild. Rules and oversight help balance this.
Futures contracts come in standard sizes and end dates. This makes them easier to trade than custom deals. Exchanges also provide:
- Matching buyers and sellers
- Completing trades
- Publishing prices
- Setting rules
Many things can be traded as futures:
- Farm products like wheat
- Energy sources like oil and gas
- Precious metals like gold
- Currencies
- Stock market indexes
- Interest rates
Companies use futures to lock in prices. An airline might buy oil futures to hedge against rising fuel costs. A farmer could sell wheat futures to get a price for their crop.
Speculators also trade futures. They try to make money from price moves without owning the actual goods. Their trading adds to market activity which makes prices more accurate.
Futures trading has these key elements:
- Contracts are standardized
- A clearinghouse backs all trades
- Prices are public
- Rules are fair
These elements create a market where many can trade easily and safely.
US Futures Exchanges Through Time
Futures trading in the US started in the mid 1800s. Farmers used private deals to sell crops later at set prices. This was risk management. The Chicago Board of Trade opened in 1848. It started with corn and wheat trading.
As railroads and telegraphs spread, farm hubs could talk faster with Chicago and East Coast money centers. Soon futures markets expanded beyond grains. The New York Cotton Exchange opened in 1870. The Kansas City Board of Trade in 1876. Later exchanges for livestock and metals followed.
The largest US futures exchange, CME, opened in 1898. As futures grew more traders without ties to the goods joined in. Bond and currency futures came to big money markets in the 1970s.
Today’s futures exchanges are much larger. More people trade derivatives now. Big exchanges have merged too. In 2007 CME and the Chicago Board of Trade merged and became the CME Group. In 2008 they bought NYMEX Holdings Inc which included NYMEX and the Commodity Exchange Inc. In 2012 they added the Kansas City Board of Trade which is known for winter wheat.
Another big US futures player is the Intercontinental Exchange (ICE). It went live in 2000. ICE bought the International Petroleum Exchange in 2001. In 2007 it acquired the New York Board of Trade and the Winnipeg Commodity Exchange. ICE then moved into stocks by buying NYSE Euronext in 2013.
Futures markets have evolved a lot over time. They went from farm products to many types of trades. Big mergers have shaped the industry too. See how these exchanges have adapted to new finance.
When did Futures Trading Start?
The Chicago Board of Trade opened in 1848. It was the first futures market. It started with crops like corn and wheat. That was the birth of futures trading in the US.
Trading on Futures Exchanges
Retail investors can’t trade directly on futures exchanges. You’ll need to use a broker who is a member of the exchange. These brokers have access to the trading floor or electronic systems. This is how the market is kept fair and secure. If you’re an active trader look for brokers that offer futures trading.
How are Futures and Stock Exchanges different?
Futures exchanges and stock exchanges serve different purposes in the financial world. You’ll find futures exchanges trading contracts for future delivery of assets. These can be commodities, currencies or even stock indexes. Stock exchanges let you buy and sell shares of companies.
The products traded on each exchange are different. On futures exchanges you’ll see options, forward contracts and other derivatives. Stock exchanges offer stocks, ETFs and related securities.
Each exchange has its own set of rules and participants. Futures exchanges attract traders who want to hedge risks or speculate on price movements. Stock exchanges bring together investors big and small who want to own pieces of companies.
What’s the Cash Deposit for Futures Trading?
Futures trading requires you to put down some money upfront. This cash deposit is called margin. Both buyers and sellers need to pay it for their trades to go through. It’s not a fee you pay but money set aside as collateral. Think of it as a safety net for the trade.
Conclusion
Futures exchanges link traders and facilitate transactions. They offer clearing to add confidence. You can’t trade on these exchanges as an individual. You’ll need to go through a member brokerage firm to trade futures. This is how risks are managed and trading is smooth.