What is futures and options market


Working with participants in the industry such as traders, fund managers and natural hedgers, a futures exchange designs a contract to meet the greatest need. If the exchange succeeds, it will have designed a futures product that many players can use or trade, and volume in the futures will grow.

Contract specifications can sometimes be changed by the exchange, and is usually done to keep the contract viable. To stand in a trading pit, a trader needs to buy an exchange membership, pay annual dues, and register with various regulatory agencies. Naturally, few people would trade futures if it required that they stand in the trading pit. To solve this problem, in steps the futures broker. A futures broker acts as a communication link between the trading pit and the trader, taking orders from the customer, and executing them in the futures pit.

By law, futures brokers do not have the authority to take customer funds and hold them in deposit. Only an FCM can do this. For this reason, a futures broker needs to team up with an FCM in order to provide order execution services to its customers. In a literal sense, it stands as a buyer to every seller and a seller to every buyer. That means that a futures trader does not have to worry about any default of a futures counterparty. What happens if that person cannot pay?

Does A sacrifice her profit? The answer is "NO". The clearing corporation guarantees the transaction. The clearing corporation's elimination of such counterparty credit risk provides a great benefit to the futures and options markets.

One may wonder how the clearing corporation does this. The answer lies in the margin deposit that every other futures trader must make before trading any contract. You may have wondered who determines these specifications.

The answer is the futures exchange. Working with participants in the industry such as traders, fund managers and natural hedgers, a futures exchange designs a contract to meet the greatest need. If the exchange succeeds, it will have designed a futures product that many players can use or trade, and volume in the futures will grow.

Contract specifications can sometimes be changed by the exchange, and is usually done to keep the contract viable. To stand in a trading pit, a trader needs to buy an exchange membership, pay annual dues, and register with various regulatory agencies.

Naturally, few people would trade futures if it required that they stand in the trading pit. To solve this problem, in steps the futures broker. A futures broker acts as a communication link between the trading pit and the trader, taking orders from the customer, and executing them in the futures pit. By law, futures brokers do not have the authority to take customer funds and hold them in deposit.

Only an FCM can do this. For this reason, a futures broker needs to team up with an FCM in order to provide order execution services to its customers. In a literal sense, it stands as a buyer to every seller and a seller to every buyer.

That means that a futures trader does not have to worry about any default of a futures counterparty. What happens if that person cannot pay? Does A sacrifice her profit? The answer is "NO". The clearing corporation guarantees the transaction.

The clearing corporation's elimination of such counterparty credit risk provides a great benefit to the futures and options markets.