Mechanics of the Futures Market

The commodity futures market is a zero-sum game. This means that for every buyer, there needs to be a seller. If there are more people looking to buy, the price must rise until there are others willing to sell. When there are more people trying to sell, the price will fall until others step in to buy. It is a transparent competition to buy and sell, with the winners of the moment determining the price.

The price the buyers are willing to pay is the bid; the price the sellers are willing to sell is the offer. When a seller’s offer and buyer’s bid hit the same price, the deal is done and a contract is formed. This represents trading volume. If the trade represented 100 contracts, then the volume would increase by 100 units.

If before the end of the day 50 of the contracts were offset or delivered; then at the end of the day, only the remaining 50 would be added to the open interest. Open interest is the number of futures market positions that have not been closed out either through offset or delivery (in other words, the futures market contracts that remain open at the close of each trading session).

As soon as anyone buys or sells a futures market contract, they must deposit money called initial margin. Futures exchanges set minimum margin requirements, usually between 5 and 18 percent of a contract’s face value, an amount of money that the Exchange determines is sufficient to cover any one-day price move.

The margin is debited or credited daily, based on the close of that day’s trading session (referred to as marking to the market) with respect to the customer’s open position. A customer must maintain a set minimum margin known as maintenance margin. When the debits from a market loss reduce the funds in the customer’s account below the maintenance level, the broker calls the customer for additional funds to restore the account to the initial margin level. This request for additional money is called a margin call.

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Futures and options trading involve substantial risk. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. In no event should the content of this website be construed as an express or an implied promise, guarantee or implication by or from Commodity Trading Solutions, LLC that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Information provided on this website is intended solely for informative purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.