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All trading on exchanges used to take place in what are called trading pits. These are polygon shaped rings with steps descending into the centre. The traders stand in the pits on the steps facing each other. The traders in the pit are either brokers, whose job is to execute (by open outcry) the orders of other traders who are outside the pit or exchange, or locals, who are independent traders trading purely for their own profit. Around each pit, which is used as a marketplace for only one contract, there are phone booths manned by phone brokers. An order, originating from outside the exchange, is placed by telephone, with a phone broker, who then signals the order to their broker in the pit, who executes it. The value of the pit brokers is obvious, the value of the local is less apparent. Locals, though, perform an essential role for the market. Although the aim of the local is to create a profit for themselves, the by-product of their active trading is that they create liquidity in the market. Liquidity is essential if a market is to thrive. Potential market participants are only interested in trading markets with reasonable liquidity. Liquidity offers the assurance that they will be able to enter and exit positions as and when they want. In recent years electronic market places have risen to replace the open outcry markets. Open outcry still predominates on the U.S. exchanges, although with an increased reliance on electronic aids. Electronic markets have many benefits over the traditional markets. The costs of trading are reduced, access and transparency are improved, and a level playing field is created. LIFFE decided to become an electronic exchange in 1998 and has gradually moved all their individual futures markets from the pits to LIFFE Connect, their totally electronic trading platform. What are Futures used for? There are 3 primary reasons for participating in the futures market. |
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