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The frantic shouting and signaling of bids and offers on the trading floor of a
futures exchange undeniably convey an impression of chaos. The reality however,
is that chaos is what futures markets replaced. Prior to the establishment of
central grain markets in the mid-nineteenth century, the nation farmers carted
their newly harvested crops over plank roads to major population and
transportation centers each fall in search of buyers. The seasonal glut drove
prices to giveaway levels and, indeed, to throwaway levels as grain often rotted
in the streets or was dumped in rivers and lakes for lack of storage. Come
spring, shortages frequently developed and foods made from corn and wheat became
barely affordable luxuries. Throughout the year, it was each buyer and seller
for himself with neither a place nor a mechanism for organized, competitive
bidding. The first central markets were formed to meet that need. Eventually,
contracts were entered into for forward as well as for spot (immediate)
delivery. So-called forwards were the forerunners of present day futures
contracts.
Spurred by the need to manage price and interest rate risks that exist in
virtually every type of modern business, today's futures markets have also
become major financial markets. Participants include mortgage bankers as well as
farmers, bond dealers as well as grain merchants, and multinational corporations
as well as food processors, savings and loan associations, and individual
speculators.
Futures prices arrived at through competitive bidding are
immediately and continuously relayed around the world by
wire and satellite. A farmer in Nebraska, a merchant in
Amsterdam, an importer in Tokyo and a speculator in Ohio
thereby have simultaneous access to the latest
market-derived price quotations. And, should they choose,
they can establish a price level for future delivery--or for
speculative purposes--simply by having their broker buy or
sell the appropriate contracts. Images created by the
fast-paced activity of the trading floor notwithstanding,
regulated futures markets are a keystone of one of the
world's most orderly envied and intensely competitive
marketing systems.
Should you at some time decide to trade in futures contracts, either for
speculation or in connection with a risk management strategy, your orders to buy
or sell would be communicated by phone from the brokerage office you use and
then to the trading pit or ring for execution by a floor broker. If you are a
buyer, the broker will seek a seller at the lowest available price. If you are a
seller, the broker will seek a buyer at the highest available price. That's what
the shouting and signaling is about.
In either case, the person who takes the opposite
side of your trade may be or may represent someone
who is a commercial hedger or perhaps someone who is
a public speculator. Or, quite possibly, the other
party may be an independent floor trader. In
becoming acquainted with futures markets, it is
useful to have at least a general understanding of
who these various market participants are, what they
are doing and why
Next:
What is a Futures Contract?
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