Futures exchanges provide physical or electronic trading venues, details of standardized contracts, market and price data, clearing houses, exchange self-regulations, margin mechanisms, settlement procedures, delivery times, delivery procedures and other services to foster trading in futures contracts.
Non-profit, member-owned futures exchanges benefit their members, who earn commissions and revenue acting as brokers or market makers; they are privately owned.
For-profit futures exchanges earn most of their revenue from trading and clearing fees, and are often public corporations.
For example, ICE frozen concentrate orange juice contracts specify delivery locations as exchange-licensed warehouses in Florida, New Jersey, or Delaware,[7] while in the case of CME live cattle contracts, delivery is to exchange-approved livestock yards and slaughter plants in the Midwest.
[9] Futures exchanges provide access to clearing houses that stand in the middle of every trade.
[12] When traders cannot pay the variation margin they owe or are otherwise in default the clearing house closes their positions and tries to cover their remaining obligations to other traders using their posted initial margin and any reserves available to the clearing house.
They include the CME-owned SPAN (a grid simulation method used by the CME and about 70 other exchanges), STANS (a Monte Carlo simulation based methodology used by the Options Clearing Corporation (OCC)), TIMS (earlier used by the OCC, and still being used by a few other exchanges).
Speculators on futures price fluctuations who do not intend to make or take ultimate delivery must take care to "zero their positions" prior to the contract's expiry.
Because a contract may pass through many hands after it is created by its initial purchase and sale, or even be liquidated, settling parties do not know with whom they have ultimately traded.
He tells the story of Thales, a poor philosopher from Miletus who developed a "financial device, which involves a principle of universal application".
Confident in his prediction, he made agreements with local olive-press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready.
[17] This is a very loose example of futures trading and, in fact, more closely resembles an option contract, given that Thales was not obliged to use the olive presses if the yield was poor.
Before the exchange was created, business was conducted by traders in London coffee houses using a makeshift ring drawn in chalk on the floor.
Chicago is located at the base of the Great Lakes, close to the farmlands and cattle country of the Midwest, making it a natural center for transportation, distribution, and trading of agricultural produce.
Gluts and shortages of these products caused chaotic fluctuations in price, and this led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in "to arrive" or "cash forward" contracts to insulate them from the risk of adverse price change and enable them to hedge.
Additionally, the forward contracts market was very illiquid, and an exchange was needed that would bring together a market to find potential buyers and sellers of a commodity instead of making people bear the burden of finding a buyer or seller.
Following the end of the postwar international gold standard, in 1972 the CME formed a division called the International Monetary Market (IMM) to offer futures contracts in foreign currencies: British pound, Canadian dollar, German mark, Japanese yen, Mexican peso, and Swiss franc.
[22] Futures trading used to be very active in India in the early to late 19th Century in the Marwari business community.
[24] There are strong grounds to believe that commodity futures could have existed in India for thousands of years before then, with references to the existence of market operations similar to the modern day futures market in Kautilya's Arthashastra written in the 2nd century BCE.
These (in particular the 90‑day Eurodollar contract introduced in 1981) had an enormous impact on the development of the interest rate swap market.
The London International Financial Futures Exchange (LIFFE), was launched in 1982, to take advantage of the removal of currency controls in the UK in 1979.
With the addition of the New York Mercantile Exchange (NYMEX) the trading and hedging of financial products using futures dwarfs the traditional commodity markets, and plays a major role in the global financial system, trading over $1.5 trillion per day in 2005.
As at the end of 2007, AfMX® had developed a system of secure data storage providing online services for brokerage firms.