Beginning Monday, May 14, the InterContinental Exchange (ICE) will provide futures and options contracts for corn, wheat, soybeans, soybean meal, and soybean oil, as announced on April 12. All five contracts will be settled daily to the equivalent Chicago Board of Trade (CBOT) prices, with cash settlement rather than physical delivery being used for final settlement. Trading hours will be from 8 p.m. Sunday to 6 p.m. Friday, which is significantly longer than the existing CBOT trading hours of 6:00 p.m. to 7:15 a.m. and 9:30 a.m. to 1:15 p.m.
ELX Futures (ELX), which launched for business in July 2009, was rumored to be aiming to introduce its own suite of agricultural contracts less than three weeks later. The ELX has five interest rate contracts that compete with the CBOT’s Treasury-based contracts: 2-, 5-, and 10-Year Treasury Notes, as well as 30-Year and Ultra Treasury Bonds. ELX also offers a Eurodollar contract that competes with the Chicago Mercantile Exchange’s flagship interest rate contract (CME).
What exactly is going on here? Is there a likelihood for any of these new contracts to succeed? What does this entail for farmers and other players in the market?
Operating a futures exchange has become a fiercely competitive industry, with exchanges all over the world looking for new ways to increase volume. ICE and CME Collection the parent company for CME and CBOT, as well as NYMEX (New York Mercantile Exchange) and COMEX (Commodity Exchange) are both publicly traded, for-profit organizations; ELX is a privately held enterprise controlled by a group of investment banks, trading firms, and technology providers. Unlike the old days of member-owned exchanges, today’s exchanges are primarily controlled by shareholders who expect these companies to not only generate a profit, but to grow that profit year after year.
The majority of an exchange’s revenue comes from various trading-related fees. As a result, profits are inextricably related to an exchange’s overall trading volume, which can only be boosted in a few ways:
Each of these approaches has its own set of difficulties. For example, it is difficult to find a consistent supply of new users for the CBOT corn contract, which has been active for over a century and a half. Similarly, existing corn contract users are only likely to generate a small amount of new trading activity. Hedgers are likely already using the optimal quantity of futures contracts, and speculators are motivated by lucrative trading opportunities and market movements over which the exchange has little control. Although establishing new futures contracts appears to be a viable source of future development, it is a costly and time-consuming operation with a high failure rate. According to a recent survey by Futures and Options World, 52 percent of the 584 new contracts launched around the world in 2011 failed to trade even once. Most of the remaining 48 percent, according to history, will see very little trade activity before eventually disappearing.
The final strategy of increasing volume is to grab contracts and customers from other exchanges, which takes us to the recent happenings. Simply put, convincing clients to switch their business from an established and actively-trading contract is exceedingly difficult for a second (or possibly third) exchange to introduce a competitive futures contract. Liquidity, for hedgers and speculators alike, takes precedence over all other indicators of market success. Because liquidity tends to concentrate in a single contract, the first exchange to develop a liquid contract often controls the market for that commodity going forward. This helps to explain why for most commodities, there is only one futures contract.
Over the years, there have been numerous instances where market players had compelling reasons to switch to a competing exchange. Traders rarely followed through on these reasons, which ranged from market disruptions at the leading exchange to lower trading expenses at the alternative exchange. In reality, just one documented incidence of a successful contract switching from one exchange to another has been documented. Trading in the Bund (German government bond) contract shifted from London’s LIFFE exchange to the EUREX exchange outside of Frankfurt in 1998. This migration was backed by the German government and German banks, who were determined to bring the Bund contract back to its “home” market, which explains why it was so successful.
The experience of ELX in attempting to gain a piece of the CBOT and CME interest rate business is more typical. ELX has competed on trading expenses, charging only 18 cents per round-turn per contract versus $1.12 at CBOT and $2.38 at CME. In the interest rate futures area, ELX has unable to make a dent after over two years of battling against CBOT and nearly a year versus CME. In April 2012, the ELX traded only 15,564 interest rate futures, compared to approximately 40 million on the CBOT and nearly 33 million on the CME. The Minneapolis Grain Exchange (MGE) has had similar success in its efforts to establish cash-settled corn, soybean, and wheat contracts in the agricultural markets.
Finally, what does all of this activity imply for users of the market? Consumers gain from competition, and prior exchange competitions have resulted in cheaper trading prices, improved customer service, and updated contract specifications. In this situation, the CBOT said that, starting later this month, it would raise its trading hours to 22 hours per day to match the ICE trading hours. While a longer trading day may not be appealing to US growers and handlers, it does recognize the worldwide nature of the grain and oilseed markets. Anything that makes it easier for foreign firms to participate in these markets would improve the price discovery function of futures and options, which benefits everyone.
What are the different forms of futures?
Futures are frequently employed in a variety of sectors to protect against price volatility and by speculators looking to profit from price swings. A futures contract gives a buyer or seller the right to buy or sell a certain item at a predetermined price in the future.
Futures come in a variety of shapes and sizes, both in the financial and commodity markets. Stock, index, currency, and interest futures are examples of financial futures. Futures are also available for agricultural products, gold, oil, cotton, oilseed, and other commodities.
What exactly are the various futures contracts?
A futures contract is a legally binding contract that requires the parties involved to trade into an asset at a predetermined price and on a predetermined date. In such contracts, the market price of the asset at the time of contract expiration is unimportant. The contracting parties must settle the trade at the price agreed upon when the contract was signed. Futures contracts are standardized in nature, stating the price, quality, and quantity in advance so that traders can trade them on a futures market without interruption. We classify futures contracts into a variety of categories based on the underlying asset. Commodities futures, stocks and bonds futures, currency futures, and interest rate futures are the most frequent types of futures contracts.
In futures, how much is a tick worth?
A tick is the smallest price movement in all futures contracts. The exchange determines tick sizes, which vary by contract instrument. The NYMEX WTI Crude Oil contract has a tick size of 1 cent and a contract size of 1,000 barrels. As a result, a one tick move is worth $10.
In a futures contract, how many shares are there?
- After the Commodity Futures Modernization Act (CFMA) of 2000, SSFs began trading in the United States in 2002.
- The only exchange to offer SSFs in the United States was OneChicago, a joint venture between CME and CBOE that closed in 2020.
- Each contract is for the purchase or sale of 100 shares of the underlying stock.
How are futures traded?
A futures contract is a contract to purchase or sell an item at a predetermined price at a future date. Soybeans, coffee, oil, individual stocks, ETFs, cryptocurrencies, and a variety of other assets could be used. Futures contracts are often traded on an exchange, with one side agreeing to buy a specific quantity of securities or commodities and take delivery on a specific date. The contract’s selling party agrees to provide it.
What is the purpose of futures contracts?
Futures are financial derivatives that bind the parties to trade an item at a fixed price and date in the future. Regardless of the prevailing market price at the expiration date, the buyer or seller must purchase or sell the underlying asset at the predetermined price.
What is the size of a futures contract?
The deliverable quantity of a stock, commodity, or other financial instrument that underpins a futures or options contract is referred to as contract size. It’s a standardized number that notifies buyers and sellers the exact quantities of goods they’re buying or selling based on the contract’s parameters.
Is there a difference between a forward contract and a futures contract?
- Forward and futures contracts involve two parties agreeing to buy and sell an asset at a specific price on a specific date.
- A forward contract is a private, customisable agreement that is exchanged over the counter and settles at the end of the term.
- A futures contract has fixed terms and is traded on an exchange, with prices settled daily until the contract’s expiry.
- Forward contracts are unregulated, whereas futures are controlled by the Commodity Futures Trading Commission.
- Forwards have a higher counterparty risk than futures, which are less dangerous because there is nearly no likelihood of default.