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Orders in the Pit
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 7 -- Orders in
the Pit
A brokerage firm ("house") that is a member of the Chicago Mercantile
Exchange (CME) places orders to buy or sell futures or options contracts for
companies or individuals and earns a commission on each transaction. Everyone
who trades futures and options contracts must have an account with a brokerage
house.
Placing
the Order
When you call in an order, you specify the futures contract you want to buy or
sell, including the contract month. Each commodity has more than one contract,
each one with a different maturity date. For example, there are four Eurodollar
futures with maturity dates of March, June, September and December. So if you
want June Eurodollars, you have to let the brokerage firm know that. You also
say whether you’re buying or selling and how many contracts you want bought or
sold. Sometimes you even dictate the price.
The market
order is one type of order. When you place a market order, you are asking that
order to be filled at the best available price immediately after receipt of the
order. You might say, "Buy 2 December Deutsche marks at the market."
After the brokerage firm writes up this order, it’s rushed to the floor broker
in the pit who executes it right away.
If you
place a limit order, you’re asking the broker to fill the order at a specified
price. If you say, "Buy 20 January Lumber at 395 even"
($395.00/thousand board feet), the floor broker can fill the order at 395.00 or
any price lower, but not at a higher price. Likewise, if you say "Sell 10
May Lumber at 40 even" ($400.00/thousand board feet), the floor broker can
fill the order at 400.00 or any price higher, but not at a lower price.
If the price you state in your limit order isn’t reached during the trading
session, your order wouldn’t be filled at all.
A Spread trade is a specialized type of trade involving the simultaneous
purchase and sale of two different but related futures contracts. The spread is
the price difference between the two contracts.
Spread trading can include trading different delivery months of the same
commodity (March Lumber vs. July Lumber) or trading the same months of different
futures contracts.
NEXT: Lesson
#8 - The Trading Pit