Futures Exchange
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A futures exchange or futures market is a central
financial exchange An exchange, bourse (), trading exchange or trading venue is an organized market where (especially) tradable securities, commodities, foreign exchange, futures, and options contracts are bought and sold. History 12th century: Brokers on th ...
where people can trade standardized
futures contract In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
s defined by the exchange. Futures contracts are
derivatives The derivative of a function is the rate of change of the function's output relative to its input value. Derivative may also refer to: In mathematics and economics * Brzozowski derivative in the theory of formal languages * Formal derivative, an ...
contracts to buy or sell specific quantities of a
commodity In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a comm ...
or financial instrument at a specified price with delivery set at a specified time in the future. Futures exchanges provide physical or electronic trading venues, details of standardized contracts, market and price data, clearing houses, exchange self-regulations,
margin Margin may refer to: Physical or graphical edges *Margin (typography), the white space that surrounds the content of a page *Continental margin, the zone of the ocean floor that separates the thin oceanic crust from thick continental crust *Leaf ...
mechanisms, settlement procedures, delivery times, delivery procedures and other services to foster trading in futures contracts. Futures exchanges can be organized as non-profit member-owned organizations or as for-profit organizations. Futures exchanges can be integrated under the same brand name or organization with other types of exchanges, such as
stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
s, options markets, and
bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, bu ...
s. Non-profit member-owned futures exchanges benefit their members, who earn commissions and revenue acting as
brokers A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...
or market makers. For-profit futures exchanges earn most of their revenue from trading and clearing fees.


Role in futures contracts standardization

Futures exchanges establish standardized contracts for trading on their trading venues, and they usually specify the following: assets to be delivered in the contract, delivery arrangements, delivery months, pricing formula for daily and final settlement, contract size, and price position and limits. For assets to be delivered, futures exchanges usually specify one or more grades of a commodity acceptable for delivery and for any price adjustments applied to delivery. For example, the standard deliverable grade for CME Group's corn futures contract is "No. 2 Yellow", but holders of short positions in the contract can deliver "No. 3 Yellow" corn for 1.5 cents less than the contract delivery price per
bushel A bushel (abbreviation: bsh. or bu.) is an imperial and US customary unit of volume based upon an earlier measure of dry capacity. The old bushel is equal to 2 kennings (obsolete), 4 pecks, or 8 dry gallons, and was used mostly for agricult ...
. The locations where assets are delivered are also specified by the futures exchanges, and they may also specify alternative delivery locations and any price adjustments available when delivering to alternative locations. Delivery locations accommodate the particular delivery, storage, and marketing needs of the deliverable asset. For example, ICE frozen concentrate orange juice contracts specify delivery locations as exchange-licensed warehouses in Florida, New Jersey, or Delaware, while in the case of CME
live cattle Live cattle is a type of futures contract that can be used to hedge and to speculate on fed cattle prices. Cattle producers, feedlot operators, and merchant exporters can hedge future selling prices for cattle through trading live cattle futures, ...
contracts, delivery is to exchange-approved livestock yards and slaughter plants in the Midwest. The futures exchange also determines the amount of deliverable assets for each contract, which determines a contract's size. Contract sizes that are too large will dissuade trading and hedging of small positions, while contract sizes that are too small will increase transaction costs since there are costs associated with each contract. In some cases, futures exchanges have created "mini" contracts to attract smaller traders. For example, the CME Group's Mini Nasdaq 100 contract is on 20 times the Nasdaq 100 index.


Clearing and margin mechanisms

Futures exchanges provide access to clearing houses that stand in the middle of every trade. Suppose trader A purchases of gold futures contracts from trader B. Trader A really bought a futures contract to buy of gold from the clearing house at a future time, and trader B really has a contract to sell to the clearing house at that same time. Since the clearing house took on the obligation of both sides of that trade, trader A does not have to worry about trader B becoming unable or unwilling to settle the contract – they do not have to worry about trader B's
credit risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...
. Trader A only has to worry about the ability of the clearing house to fulfill their contracts. Even though clearing houses are exposed to every trade on the exchange, they have more tools to manage credit risk. Clearing houses can issue ''Margin Calls'' to demand traders to deposit Initial Margin moneys when they open a position, and deposit Variation Margin (or Mark-to-Market Margin) moneys when existing positions experience daily losses. A
margin Margin may refer to: Physical or graphical edges *Margin (typography), the white space that surrounds the content of a page *Continental margin, the zone of the ocean floor that separates the thin oceanic crust from thick continental crust *Leaf ...
in general is
collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...
that the holder of a financial instrument has to deposit to cover some or all of the
credit risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...
of their
counterparty A counterparty (sometimes contraparty) is a legal entity, unincorporated entity, or collection of entities to which an exposure of financial risk may exist. The word became widely used in the 1980s, particularly at the time of the Basel I deliberat ...
, in this case the central counterparty clearing houses. Traders on both sides of a trade has to deposit Initial Margin, and this amount is kept by the clearing house and not remitted to other traders. Clearing houses calculate day-to-day profit and loss amounts by ' marking-to-market' all positions by setting their new cost to the previous day's settlement value, and computing the difference between their current day settlement value and new cost. When traders accumulate losses on their position such that the balance of their existing posted margin and their new debits from losses is below a thresh-hold called a ''maintenance margin'' (usually a fraction of the initial margin) at the end of a day, they have to send Variation Margin to the exchange who passes that money to traders making profits on the opposite side of that position. When traders accumulate profits on their positions such that their margin balance is above the maintenance margin, they are entitled to withdraw the excess balance. The margin system ensures that on any given day, if all parties in a trade closed their positions after variation margin payments after settlement, nobody would need to make any further payments as the losing side of the position would have already sent the whole amount, they owe to the profiting side of the position. The clearinghouse do not keep any variation margin. When traders cannot pay the variation margin they owe or are otherwise in default the clearing house closes their positions and tries to cover their remaining obligations to other traders using their posted initial margin and any reserves available to the clearing house. Several popular methods are used to compute initial margins. They include the CME-owned
SPAN Span may refer to: Science, technology and engineering * Span (unit), the width of a human hand * Span (engineering), a section between two intermediate supports * Wingspan, the distance between the wingtips of a bird or aircraft * Sorbitan ester ...
(a grid simulation method used by the CME and about 70 other exchanges),
STANS Stans () is the capital of the canton of Nidwalden (Nidwald) in Switzerland. The official language of Stans is German (spoken there in the variety of Swiss Standard German), but the main language is the local variant of Alemannic Swiss German. ...
(a Monte Carlo simulation based methodology used by the Options Clearing Corporation (OCC)), TIMS (earlier used by the OCC, and still being used by a few other exchanges). Traders do not interact directly with the exchange – they interact with clearing house members, usually futures brokers, who pass contracts and margin payments on to the exchange. Clearing house members are directly responsible for initial margin and variation margin requirements at the exchange even if their clients default on their obligations, so they may require more initial margin (but not variation margin) from their clients than is required by the exchange to protect themselves. Since clearing house members usually have many clients, they can net out margin payments from their client's offsetting positions. For example, if a clearing house member have half of their clients holding a total of 1000 long position in a contract, and half of their clients holding a total of 500 short position in a contract, the clearing house member is only responsible for the initial and variation margin of a net 500 contracts.


Nature of contracts

Exchange-traded contracts are standardized by the exchanges where they trade. The contract details what asset is to be bought or sold, and how, when, where and in what quantity it is to be delivered. The terms also specify the currency in which the contract will trade, minimum tick value, and the last trading day and expiry or
delivery month For futures contracts specifying physical delivery, the delivery month is the month in which the seller must deliver, and the buyer must accept and pay for, the underlying. For contracts specifying cash settlement, the delivery month is the month o ...
. Standardized commodity futures contracts may also contain provisions for adjusting the contracted price based on deviations from the "standard" commodity, for example, a contract might specify delivery of heavier
USDA The United States Department of Agriculture (USDA) is the federal executive department responsible for developing and executing federal laws related to farming, forestry, rural economic development, and food. It aims to meet the needs of com ...
Number 1 oats at par value but permit delivery of Number 2 oats for a certain seller's penalty per bushel. Before the market opens on the first day of trading a new futures contract, there is a specification, but no actual contracts exist. Futures contracts are not issued like other securities, but are "created" whenever
open interest Open interest (also known as open contracts or open commitments) refers to the total number of outstanding derivative contracts that have not been settled (offset by delivery). For each buyer of a futures contract there must be a seller. From the t ...
increases; that is, when one party first buys (goes
long Long may refer to: Measurement * Long, characteristic of something of great duration * Long, characteristic of something of great length * Longitude (abbreviation: long.), a geographic coordinate * Longa (music), note value in early music mens ...
) a contract from another party (who goes
short Short may refer to: Places * Short (crater), a lunar impact crater on the near side of the Moon * Short, Mississippi, an unincorporated community * Short, Oklahoma, a census-designated place People * Short (surname) * List of people known as ...
). Contracts are also "destroyed" in the opposite manner whenever open interest decreases because traders resell to reduce their long positions or rebuy to reduce their short positions. Speculators on futures price fluctuations who do not intend to make or take ultimate delivery must take care to "zero their positions" prior to the contract's expiry. After expiry, each contract will be
settled A settler is a person who has migrated to an area and established a permanent residence there, often to colonize the area. A settler who migrates to an area previously uninhabited or sparsely inhabited may be described as a pioneer. Settle ...
, either by physical delivery (typically for commodity underlyings) or by a cash settlement (typically for financial underlyings). The contracts ultimately are not between the original buyer and the original seller, but between the holders at expiry and the exchange. Because a contract may pass through many hands after it is created by its initial purchase and sale, or even be liquidated, settling parties do not know with whom they have ultimately traded.


Regulators

Each exchange is normally regulated by a national governmental (or semi-governmental) regulatory agency:


History


Ancient times

In Ancient Mesopotamia, around 1750 BC, the sixth Babylonian king,
Hammurabi Hammurabi (Akkadian: ; ) was the sixth Amorite king of the Old Babylonian Empire, reigning from to BC. He was preceded by his father, Sin-Muballit, who abdicated due to failing health. During his reign, he conquered Elam and the city-states ...
, created one of the first legal codes: the
Code of Hammurabi The Code of Hammurabi is a Babylonian legal text composed 1755–1750 BC. It is the longest, best-organised, and best-preserved legal text from the ancient Near East. It is written in the Old Babylonian dialect of Akkadian, purportedly by Hamm ...
. Hammurabi's Code allowed sales of goods and assets to be delivered for an agreed price at a future date; required contracts to be in writing and witnessed; and allowed assignment of contracts. The code facilitated the first derivatives, in the form of forward and futures contracts. An active derivatives market existed, with trading carried out at temples. One of the earliest written records of futures trading is in
Aristotle Aristotle (; grc-gre, Ἀριστοτέλης ''Aristotélēs'', ; 384–322 BC) was a Greek philosopher and polymath during the Classical period in Ancient Greece. Taught by Plato, he was the founder of the Peripatetic school of phil ...
's ''
Politics Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that studies ...
''. He tells the story of
Thales Thales of Miletus ( ; grc-gre, Θαλῆς; ) was a Greek mathematician, astronomer, statesman, and pre-Socratic philosopher from Miletus in Ionia, Asia Minor. He was one of the Seven Sages of Greece. Many, most notably Aristotle, regarded him ...
, a poor philosopher from
Miletus Miletus (; gr, Μῑ́λητος, Mī́lētos; Hittite transcription ''Millawanda'' or ''Milawata'' (exonyms); la, Mīlētus; tr, Milet) was an ancient Greek city on the western coast of Anatolia, near the mouth of the Maeander River in a ...
who developed a "financial device, which involves a principle of universal application". Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive-press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or pathetic and because the olive-press owners were willing to
hedge A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoin ...
against the possibility of a poor yield. When the harvest-time came, and a sharp increase in demand for the use of the olive presses outstripped supply (availability of the presses), he sold his future use contracts of the olive presses at a rate of his choosing, and made a large amount of money. This is a very loose example of futures trading and, in fact, more closely resembles an
option contract An option contract, or simply option, is defined as "a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer". Option contracts are common in professional sports. An option contrac ...
, given that Thales was not obliged to use the olive presses if the yield was poor.


Modern era

The first modern organized futures exchange began in 1710 at the Dojima Rice Exchange in
Osaka is a designated city in the Kansai region of Honshu in Japan. It is the capital of and most populous city in Osaka Prefecture, and the third most populous city in Japan, following Special wards of Tokyo and Yokohama. With a population of 2. ...
, Japan. The London Metal Market and Exchange Company (
London Metal Exchange The London Metal Exchange (LME) is a futures and forwards exchange with the world's largest market in standarised forward contracts, futures contracts and options on base metals. The exchange also offers contracts on ferrous metals and precious ...
) was founded in 1877, but the market traces its origins back to 1571 and the opening of the
Royal Exchange, London The Royal Exchange in London was founded in the 16th century by the merchant Sir Thomas Gresham on the suggestion of his factor Richard Clough to act as a centre of commerce for the City of London. The site was provided by the City of London ...
. Before the exchange was created, business was conducted by traders in London
coffee house A coffeehouse, coffee shop, or café is an establishment that primarily serves coffee of various types, notably espresso, latte, and cappuccino. Some coffeehouses may serve cold drinks, such as iced coffee and iced tea, as well as other non- ...
s using a makeshift ring drawn in chalk on the floor.BBC Radio 4 ''
Today Today (archaically to-day) may refer to: * Day of the present, the time that is perceived directly, often called ''now'' * Current era, present * The current calendar date Arts, entertainment, and media Films * ''Today'' (1930 film), a 1930 ...
'', broadcast 25 October 2011.
At first only
copper Copper is a chemical element with the symbol Cu (from la, cuprum) and atomic number 29. It is a soft, malleable, and ductile metal with very high thermal and electrical conductivity. A freshly exposed surface of pure copper has a pinkis ...
was traded.
Lead Lead is a chemical element with the symbol Pb (from the Latin ) and atomic number 82. It is a heavy metal that is denser than most common materials. Lead is soft and malleable, and also has a relatively low melting point. When freshly cu ...
and
zinc Zinc is a chemical element with the symbol Zn and atomic number 30. Zinc is a slightly brittle metal at room temperature and has a shiny-greyish appearance when oxidation is removed. It is the first element in group 12 (IIB) of the periodi ...
were soon added but only gained official trading status in 1920. The exchange was closed during
World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
and did not re-open until 1952. The range of metals traded was extended to include
aluminium Aluminium (aluminum in American and Canadian English) is a chemical element with the symbol Al and atomic number 13. Aluminium has a density lower than those of other common metals, at approximately one third that of steel. I ...
(1978),
nickel Nickel is a chemical element with symbol Ni and atomic number 28. It is a silvery-white lustrous metal with a slight golden tinge. Nickel is a hard and ductile transition metal. Pure nickel is chemically reactive but large pieces are slow to ...
(1979),
tin Tin is a chemical element with the symbol Sn (from la, stannum) and atomic number 50. Tin is a silvery-coloured metal. Tin is soft enough to be cut with little force and a bar of tin can be bent by hand with little effort. When bent, t ...
(1989), aluminium alloy (1992),
steel Steel is an alloy made up of iron with added carbon to improve its strength and fracture resistance compared to other forms of iron. Many other elements may be present or added. Stainless steels that are corrosion- and oxidation-resistant ty ...
(2008), and minor metals
cobalt Cobalt is a chemical element with the symbol Co and atomic number 27. As with nickel, cobalt is found in the Earth's crust only in a chemically combined form, save for small deposits found in alloys of natural meteoric iron. The free element, pr ...
and
molybdenum Molybdenum is a chemical element with the symbol Mo and atomic number 42 which is located in period 5 and group 6. The name is from Neo-Latin ''molybdaenum'', which is based on Ancient Greek ', meaning lead, since its ores were confused with lea ...
(2010). The exchange ceased trading
plastics Plastics are a wide range of synthetic polymers, synthetic or semi-synthetic materials that use polymers as a main ingredient. Their Plasticity (physics), plasticity makes it possible for plastics to be Injection moulding, moulded, Extrusion, e ...
in 2011. The total value of the trade is around $11.6 trillion annually.
Chicago (''City in a Garden''); I Will , image_map = , map_caption = Interactive Map of Chicago , coordinates = , coordinates_footnotes = , subdivision_type = Country , subdivision_name ...
has the largest future exchange in the world, the
CME Group CME Group Inc. (Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, The Commodity Exchange) is an American global markets company. It is the world's largest financial derivatives exchange, and trades in asset class ...
. Chicago is located at the base of the
Great Lakes The Great Lakes, also called the Great Lakes of North America, are a series of large interconnected freshwater lakes in the mid-east region of North America that connect to the Atlantic Ocean via the Saint Lawrence River. There are five lakes ...
, close to the farmlands and cattle country of the
Midwest The Midwestern United States, also referred to as the Midwest or the American Midwest, is one of four Census Bureau Region, census regions of the United States Census Bureau (also known as "Region 2"). It occupies the northern central part of ...
, making it a natural center for transportation, distribution, and trading of agricultural produce. Gluts and shortages of these products caused chaotic fluctuations in price, and this led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in "to arrive" or "cash forward" contracts to insulate them from the risk of adverse price change and enable them to
hedge A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoin ...
. In March 2008 the CME announced its acquisition of NYMEX Holdings, Inc., the parent company of the New York Mercantile Exchange and Commodity Exchange. CME's acquisition of NYMEX was completed in August 2008. For most exchanges, forward contracts were standard at the time. However, forward contracts were often not honored by either the buyer or the seller. For instance, if the buyer of a
corn Maize ( ; ''Zea mays'' subsp. ''mays'', from es, maíz after tnq, mahiz), also known as corn (North American and Australian English), is a cereal grain first domesticated by indigenous peoples in southern Mexico about 10,000 years ago. Th ...
forward contract made an agreement to buy corn, and at the time of delivery the price of corn differed dramatically from the original contract price, either the buyer or the seller would back out. Additionally, the forward contracts market was very illiquid, and an exchange was needed that would bring together a market to find potential buyers and sellers of a commodity instead of making people bear the burden of finding a buyer or seller. In 1848 the Chicago Board of Trade (CBOT) was formed. Trading was originally in
forward contract In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of derivat ...
s; the first contract (on corn) was written on March 13, 1851. In 1865 standardized
futures contract In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
s were introduced. The Chicago Produce Exchange was established in 1874, renamed the
Chicago Butter and Egg Board The Chicago Butter and Egg Board, founded in 1898, was a spin-off entity of the Chicago Produce Exchange. In the year 1919, it was re-organized as the Chicago Mercantile Exchange (CME). Roots of the Chicago Butter and Egg Board are traceable to the ...
in 1898 and then reorganized into the
Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an a ...
(CME) in 1919. Following the end of the postwar international gold standard, in 1972 the CME formed a division called the
International Monetary Market The International Monetary Market (IMM), a related exchange created within the old Chicago Mercantile Exchange and largely the creation of Leo Melamed, was one of four divisions of the CME Group (CME), the largest futures exchange in the United Sta ...
(IMM) to offer futures contracts in foreign currencies:
British pound Sterling (abbreviation: stg; Other spelling styles, such as STG and Stg, are also seen. ISO code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound ( sign: £) is the main unit of sterling, an ...
,
Canadian dollar The Canadian dollar ( symbol: $; code: CAD; french: dollar canadien) is the currency of Canada. It is abbreviated with the dollar sign $, there is no standard disambiguating form, but the abbreviation Can$ is often suggested by notable style ...
, German mark,
Japanese yen The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the ...
, Mexican peso, and
Swiss franc The Swiss franc is the currency and legal tender of Switzerland and Liechtenstein. It is also legal tender in the Italian exclave of Campione d'Italia which is surrounded by Swiss territory. The Swiss National Bank (SNB) issues banknotes and the f ...
. In 1881 a regional market was founded in
Minneapolis, Minnesota Minneapolis () is the largest city in Minnesota, United States, and the county seat of Hennepin County. The city is abundant in water, with thirteen lakes, wetlands, the Mississippi River, creeks and waterfalls. Minneapolis has its origins ...
, and in 1883 introduced futures for the first time. Trading continuously since then, today the
Minneapolis Grain Exchange The Minneapolis Grain Exchange (MGEX) is a commodities and futures exchange of grain products. It was formed in 1881 in Minneapolis, Minnesota, United States as a regional cash marketplace to promote fair trade and to prevent trade abuses in whe ...
(MGEX) is the only exchange for hard red spring wheat futures and options. and and Futures trading used to be very active in India in the early to late 19th Century in the Marwari business community. Several families made their fortunes in opium futures trading in Calcutta and Bombay. There are records available of standardized opium futures contracts made in the 1870-1880s in Calcutta. There are strong grounds to believe that commodity futures could have existed in India for thousands of years before then, with references to the existence of market operations similar to the modern day futures market in Kautilya's ''
Arthashastra The ''Arthashastra'' ( sa, अर्थशास्त्रम्, ) is an Ancient Indian Sanskrit treatise on statecraft, political science, economic policy and military strategy. Kautilya, also identified as Vishnugupta and Chanakya, is ...
'' written in the 2nd century BCE. The first organised futures market was established in 1875 by the Bombay Cotton Trade Association to trade in cotton contracts. This occurred soon after the establishment of trading in cotton Futures in UK, as Bombay was a very important hub for cotton trade in the British Empire. Futures trading in raw jute and jute goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd., in 1919. In modern times, most of the futures trading happens in th
National Multi commodity Exchange
(NMCE) which commenced futures trading in 24 commodities on 26 November 2002 on a national scale. Currently (August 2007) 62 commodities are being traded on the NMCE.


Recent developments

The 1970s saw the development of the
financial future In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
s contracts, which allowed trading in the future value of
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
s. These (in particular the 90‑day
Eurodollar Eurodollars are U.S. dollars held in time deposit accounts in banks outside the United States, which thus are not subject to the legal jurisdiction of the U.S. Federal Reserve. Consequently, such deposits are subject to much less regulation than ...
contract introduced in 1981) had an enormous impact on the development of the
interest rate swap In finance, an interest rate swap (IRS) is an interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a "linear" IRD and one of the most liquid, benchmark products. It has associations wit ...
market. The London International Financial Futures Exchange (LIFFE), was launched in 1982, to take advantage of the removal of currency controls in the UK in 1979. The exchange modelled itself after the Chicago Board of Trade and the Chicago Mercantile Exchange. LIFFE was acquired by Euronext in 2002, which in turn was acquired by NYSE in 2006. The combined NYSE Euronext, including LIFFE, was purchased by ICE in 2014. Today, the futures markets have far outgrown their agricultural origins. With the addition of the
New York Mercantile Exchange The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City. T ...
(NYMEX) the trading and hedging of financial products using futures dwarfs the traditional commodity markets, and plays a major role in the
global financial system The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic actors that together facilitate international flows of financial capital for purposes of investment and trade finan ...
, trading over $1.5 trillion per day in 2005. The recent history of these exchanges (Aug 2006) finds the
Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an a ...
trading more than 70% of its futures contracts on its "Globex" trading platform and this trend is rising daily. It counts for over $45.5 billion of nominal trade (over 1 million contracts) every single day in "
electronic trading In finance, an electronic trading platform also known as an online trading platform, is a computer software program that can be used to place orders for financial products over a network with a financial intermediary. Various financial products c ...
" as opposed to
open outcry Open outcry is a method of communication between professionals on a stock exchange or futures exchange, typically on a trading floor. It involves shouting and the use of hand signals to transfer information primarily about buy and sell order ...
trading of futures, options and derivatives. In June 2001
Intercontinental Exchange Intercontinental Exchange, Inc. (ICE) is an American company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the Fortune 500, S&P 500, and Russe ...
(ICE) acquired the
International Petroleum Exchange International is an adjective (also used as a noun) meaning "between nations". International may also refer to: Music Albums * ''International'' (Kevin Michael album), 2011 * ''International'' (New Order album), 2002 * ''International'' (The T ...
(IPE), now ICE Futures, which operated Europe's leading open-outcry energy futures exchange. Since 2003 ICE has partnered with the Chicago Climate Exchange (CCX) to host its electronic marketplace. In April 2005 the entire ICE portfolio of energy futures became fully electronic. In 2005, The
Africa Mercantile Exchange Africa is the world's second-largest and second-most populous continent, after Asia in both cases. At about 30.3 million km2 (11.7 million square miles) including adjacent islands, it covers 6% of Earth's total surface area ...
(AfMX®) became the first African commodities market to implement an automated system for the dissemination of market data and information online in real-time through a wide network of computer terminals. As at the end of 2007, AfMX® had developed a system of secure data storage providing online services for brokerage firms. The year 2010, saw the exchange unveil a novel system of electronic trading, known as After®. After® extends the potential volume of processing of information and allows the Exchange to increase its overall volume of trading activities. In 2006 the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its listed c ...
teamed up with the Amsterdam-Brussels-Lisbon-Paris Exchanges "Euronext" electronic exchange to form the first transcontinental futures and options exchange. These two developments as well as the sharp growth of internet futures trading platforms developed by a number of trading companies clearly points to a race to total internet trading of futures and options in the coming years. In terms of trading volume, the
National Stock Exchange of India National Stock Exchange of India Limited (NSE) is the leading stock exchange under the ownership of various group of domestic and global financial institutions, public and privately owned entities and individuals. It is located in Mumbai, Mah ...
in
Mumbai Mumbai (, ; also known as Bombay — the official name until 1995) is the capital city of the Indian state of Maharashtra and the ''de facto'' financial centre of India. According to the United Nations, as of 2018, Mumbai is the second- ...
is the largest single-stock futures trading exchange in the world.


See also

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Bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, bu ...
*
Commodity markets A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing ...
*
Currency market The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspe ...
*
List of futures exchanges This is a list of notable futures exchanges. Those stock exchanges that also offer trading in futures contracts besides trading in securities are listed both here and the list of stock exchanges. Africa Kenya * Nairobi Securities Ex ...
*
List of traded commodities The following is a list of futures contracts on physically traded commodities. Agricultural Grains, food and fiber Symbol from "CME Group Website". cmegroup.com. CME Group. Retrieved 2010-10-20. Livestock and meat Energy Forest product ...
* Paper trading *
Prediction market Prediction markets (also known as betting markets, information markets, decision markets, idea futures or event derivatives) are open markets where specific outcomes can be predicted using financial incentives. Essentially, they are exchange-trad ...
*
Stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
*
Trader (finance) A trader is a person, firm, or entity in finance who buys and sells financial instruments, such as forex, cryptocurrencies, stocks, bonds, commodities, derivatives, and mutual funds in the capacity of agent, hedger, arbitrageur, or speculator. ...


References


Further reading


Understanding Derivatives: Markets and Infrastructure
Federal Reserve Bank of Chicago, Financial Markets Group {{Authority control