FUTURES EXCHANGES
May 12th, 2009A futures exchange is a legal corporate entity whose shareholders are its members. The members own memberships, more commonly called seats. Exchange members have the privilege of executing transactions on the exchange. Each member acts as either a floor trader or a broker. Floor traders are typically called locals; brokers are typically called futures commission merchants (FCMs). Locals are market makers, standing ready to buy and sell by quoting a bid and an ask price. They are the primary providers of liquidity to the market. FCMs execute transactions for other parties off the exchange.
The locals on the exchange floor typically trade according to one of several distinct styles. The most common is called scalping. A scalper offers to buy or sell futures contracts, holding the position for only a brief period of time, perhaps just seconds. Scalpers attempt to profit by buying at the bid price and selling at the higher ask price. A day trader holds a position open somewhat longer but closes all positions at the end of the day. Position trader holds positions open overnight. Day traders and position traders are quite distinct from scalpers in that they attempt to profit from the anticipated direction of the market; scalpers are trying simply to buy at the bid and sell at the ask.
Recall that futures exchanges have trading either on the floor or off the floor on electronic terminals, or in some cases, both. As previously described, floor trading in the United States takes place in pits, which are octagonal, multi-tiered areas where floor traders stand and conduct transactions. Traders wear jackets of specific colors and badges to indicate such information as what type of trader (FCM or local) they are and whom they represent. As noted, to indicate a willingness to trade, a trader shouts and uses a set of standard hand signals. A trade is consummated by two traders agreeing on a price and a number of contracts. These traders might not actually say anything to each other; they may simply use a combination of hand signals andlor eye contact to agree on a transaction. When a transaction is agreed on, the traders fill out small paper forms and turn them over to clerks, who then see that the transactions are entered into the system and reported. Each trader is required to have an account at a clearing firm. The clearing firms are the actual members of the clearinghouse. The clearinghouse deals only with the clearing firms, which then deal with their individual and institutional customers.
In electronic trading, the principles remain essentially the same but the traders do not stand in the pits. In fact, they do not see each other at all. They sit at computer terminals, which enable them to see the bids and offers of other traders. Transactions are executed by the click of a computer mouse or an entry from a keyboard.
Trading volume can be a misleading measure of the size of a futures markets; nonetheless, it is the measure primarily used. The structure of global futures exchanges has changed considerably in recent years. Exchanges in the United States, primarily the Chicago Board of Trade and the Chicago Mercantile Exchange, were clearly the world leaders in the past. Note that the volume leader now, however, is Eurex, the combined German-Swiss exchange. Eurex has been so successful partly because of its decision to be an all-electronic futures exchange, whereas the Chicago exchanges are still primarily pit-trading exchanges. Note the popularity of futures trading in Japan; four of the 20 leading exchanges are Japanese.