The Futures Exchange

ON-LINE TRADING LESSON
Trading futures and options involves risk and is not suitable for everyone. 

On-Line Trading Lessons

    Courtesy of the Chicago Mercantile Exchange

Lesson 2 -- The Futures Exchange

Futures contracts are traded at a futures exchange and only at a futures exchange. The Chicago Mercantile Exchange (CME), like the other exchanges in the U.S., is a nonprofit organization that provides a place to trade, formulates rules for trading and supervises trading practices.  There are currently nine futures exchanges in the U.S.

Chicago’s continued innovation has been a major reason for the growth of its exchanges. This innovation has not only taken the form of new products but includes new technologies. For example, since 1992, the CME extended overnight trading sessions for CME financial futures through GLOBEX® Trading System. CME members and CME-approved traders around the world can trade CME financial and selected currencies and equity index instruments on this computerized system throughout the night until the next day’s pit session opens again.

The Clearing Function

One of the most important functions of a futures exchange is to provide a clearing operation. At the CME, this operation is called the Clearing House. The Clearing House is responsible for clearing trades and for the day-to-day settlement. What does that mean? Well, the Clearing House records all the trades happening in the trading pits each day. At the end of the trading session, it matches or reconciles contracts bought and sold.

The Clearing House also settles the traders’ accounts to the market each day. When you buy or sell a futures contract, the exchange requires you to put up a performance bond. That’s a cash deposit to cover any loss your investment may incur. Money is added to your performance bond balance if your position earned a profit that day. However, if your position lost money that day, money is subtracted from the balance. And you may get a call to put more money into the account. The Clearing House figures that out.


Is trading at the exchanges regulated?

Yes, the federal government and the exchange both play a role in regulating trading. Federal law started regulating futures trading in 1923. The Trade Commission Act of 1974 created the Commodity Futures Trading Commission (CFTC), an independent federal body that oversees all futures trading. The National Futures Association (NFA) was created to regulate the activities of brokerage houses and their agents. These measures guarantee the integrity of the markets.

  NEXT: Lesson #3 - Contracts Traded