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How Futures and Options Markets Work
By: Rick Thachuk   Wednesday, August 8, 2007 11:57 PM
You, the customer, decide to buy or sell a futures contract, perhaps based on information originating from us.

2. You phone your order to the futures order desk of our Futures Commission Merchant (FCM).

3. The order desk relays by telephone your order to the phone clerk on the exchange floor.

4. The clerk writes the futures order, time stamps it, and delivers it to the executing floor broker in the trading pit. If a market order, the order is executed. If any other kind of order, it is placed in a "deck" along with other orders ready to be executed if triggered by price movements.

5. Once executed, the floor broker informs the clerk who informs the order desk who, in turn, informs you. You now have a futures position.

6. The FCM prepares a trade confirmation report and mails it to you.

7. The FCM marks-to-market your futures position against the margin in your trading account.

As you can see, there are several players, each having different roles, who are involved in the process. Despite the steps involved, the process has become very efficient - orders can often be executed within a minute or two while you wait on the phone.

You may wonder why a futures broker requires an FCM to complete this process. By law, futures brokers do not have the authority to take customer funds and hold them in deposit. Only an FCM can do this. For this reason, a futures broker needs to team up with an FCM in order to provide order execution services to its customers.commodity futures broker, futures trader, commodities futures trading, financial and commodity futures markets, paper trading, full service broker assisted accounts.
The Futures Commission Merchant
The Futures Commission Merchant (FCM) is responsible for holding customer funds of the margin account, clearing the futures trade, and performing all back-office recording functions such as marking-to-market your futures account, sending trade confirmations and account summaries, and year-end tax forms. Customers who open a futures trading account deposit their margin funds at an FCM.

The Clearing Corporation
The clearing corporation guarantees the performance of every buyer and seller of a futures or options contract. In a literal sense, it stands as a buyer to every seller and a seller to every buyer. As a futures trader, that means that you don't have to worry about any default of a futures counterparty. For instance, say that you purchase several Swiss franc futures and the price goes up so that you have accrued a $4,500 profit. Whoever sold those futures contracts (and there is a seller for every buyer, and vice-versa) has incurred a loss of $4,500. What happens if that person can't pay? Do you sacrifice your profit? The answer is "NO". The clearing corporation guarantees the transaction. The clearing corporation's elimination of such counterparty credit risk provides a great benefit to the futures and options markets.


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