Mechanism for trading in Future Market

The traders in future market enter into future contract either to buy or to sell certain asset as future delivery. While a trader wants to execute a trade, she/he must follow certain procedures and rules that are fixed by future exchanges. The trading procedure starts from giving orders to the brokers. In this section we need to discuss the general mechanism in which the exchange organize the trading of futures. The important issues relating to such trading like placing an order, the operation of margin accounts, delivery and settlement of contracts, the organization of exchanges, the way in which price quotes are made etc. will be discussed. Once the contracts are made, the responsibility of taking delivery from seller and making delivery to buyer goes to the clearing house.

Futures' clearing house is an independent corporation that guarantees the every trade in futures exchange. The clearing house acts as an intermediary in future transactions. Each futures exchange operates its own independent clearing house. The clearing house has a number of clearing member firms, who must deposit funds with the exchange. For each transaction obviously there is a buyer, usually called the long and a seller, typically called the short. In the absence of clearing house, each party would be responsible to the other. If one party defaulted the other would be left with worthless claim. The main task of clearing house is to keep track of all the transactions that take place during a day, so that it can calculate the net position of each of its members.

A clearing house or member or clearing firm is required to maintain a margin account with the clearing house like an investor maintain margin account with a brokerage firm. The margin deposited by clearing firm to clearing house is known as clearing margin. There is no maintenance margin and gains and losses at the end of day are settled in the same way as are the margin accounts of investors.