A futures market is an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date. Futures are exchange-traded derivatives contracts that lock in future delivery of a commodity or security at a price set today.
Examples of futures markets are the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBoT), the Cboe Options Exchange (Cboe), and the Minneapolis Grain Exchange.
Originally, such trading was carried on through open outcry and the use of hand signals in trading pits, located in financial hubs such as New York, Chicago, and London. Throughout the 21st century, like most other markets, futures exchanges have become mostly electronic.
- A futures market is an exchange where futures contracts are traded by participants who are interested in buying or selling these derivatives.
- In the U.S., futures markets are largely regulated by the Commodity Futures Trading Commission (CFTC), with futures contracts standardized by exchanges.
- Today, the majority of trading of futures markets occurs electronically, with examples including the CME and ICE.
- Unlike most stock markets, futures markets can trade 24 hours a day.
The Basics of a Futures Market
In order to understand fully what a futures market is, it’s important to understand the basics of futures contracts, the assets traded in these markets.
Futures contracts are made in an attempt by producers and suppliers of commodities to avoid market volatility. These producers and suppliers negotiate contracts with an investor who agrees to take on both the risk and reward of a volatile market.
Futures markets or futures exchanges are where these financial products are bought and sold for delivery at some agreed-upon date in the future with a price fixed at the time of the deal. Futures markets are for more than simply agricultural contracts, and now involve the buying, selling and hedging of financial products and future values of interest rates.
Futures contracts can be made or “created” as long as open interest is increased, unlike other securities that are issued. The size of futures markets (which usually increase when the stock market outlook is uncertain) is larger than that of commodity markets and is a key part of the financial system.