For nearly a century and a half, futures markets have provided an efficient and effective mechanism for the management of price risks. Beginning with agricultural futures contracts traded on the Chicago Board of Trade in 1865, the U.S. futures markets now lists a number of instruments, including metals, energy, financial instruments, foreign currencies, stock indexes, prediction markets, event futures and options on futures. In the 1990’s, exchanges introduced electronic trading enabling access to futures markets 24-hour, 7 day a week.
Futures traders speculate whether the price of a commodity will increase or decrease in value at a future time in order to make or lose a profit. A futures contract is a legally binding agreement to do so. There are two types of futures contracts, those that provide for physical delivery of a particular commodity or item and those which call for a cash settlement. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.
Futures trading participants in today’s futures markets include mortgage bankers as well as farmers, bond dealers, grain merchants, lending institutions and individual speculators.
Individuals and Corporations
Individual Futures and Options traders can trade directly through a broker or Introduced Broker account and are traditionally placed in one of two groups:
The interaction of hedgers and speculators ensures an active, liquid and competitive futures market.
Trading Advisors, Managed Accounts and Commodity Pools
A Commodity Trading Advisor (CTA) is an individual (or firm) that, for a fee, provides advice on commodity trading, including specific trading recommendations such as when to establish a particular long or short position and when to liquidate that position. Even though you may trade on the basis of an advisor’s recommendations, you will need to open your own account with, and send your margin payments directly to an FCM. CTAs cannot accept or handle their customers’ funds unless they are also registered as FCMs.
A Managed Account is also an individual account that needs to be open and held directly with an FCM. The major difference is that you give someone else—an account manager—written power of attorney to make and execute decisions about what and when to trade. It is common for terms, fees or commission deals to be associated with a managed account.
A Commodity Pool Operator (CPO) is similar in concept to a common stock mutual fund. It is the only method of participation in which you will not have your own individual trading account. Instead, your money will be combined with that of other pool participants and, in effect, traded as a single account. You share in the profits or losses of the pool in proportion to your investment in the pool.
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