Floor Brokers, Financial Management

Floor Brokers

These people have the responsibility of executing the trades forwarded by the FCMs on the floor of the exchange. They can also trade for their own account. They work as individuals or in association with an FCM as its agents.

In addition to these brokers, we also have other types of brokers whose functions are similar to those of brokers in an option exchange.

Pit

Now, the next logical question would be: Where do the floor brokers trade in the exchange? The exchange floor is divided into several physical locations called pits. According to the Federal law and the rules of the exchange, trading in futures should take place only during official trading hours in a designated area (a physical location on the exchange floor) called a pit.

Open Outcry

To realize the fair price of the commodity, floor traders are required to make an offer to all other traders present in the pit by openly shouting the bid or ask prices. This method is referred to as Open Outcry System.

The Clearing House

As mentioned earlier, the floor broker will report back to the accounts executive only after confirming the trade from the clearing house. The futures contracts are cleared by a clearing house. The clearing house can be constituted separately or as a part of the futures exchange. Nevertheless, each futures exchange is closely associated with the working of a particular clearing house. The functions of the futures clearing house are very much similar to those of the "Options Clearing Corporation", the body which we would come across when we discuss about Options. As the clearing house is well capitalized and it holds a net zero position (it exists to facilitate trading in futures for the participants and it does not trade on its own account) and finally it being an integral part of the futures market, the traders place immense faith in the institution.

Margin and Daily Settlement

The first important point to note in this regard is that each clearing house prescribes its own limits on initial, maintenance and variation margins. Therefore, the margins we mention here cannot be applied universally. One of the main differences between options and futures is that in futures both the contracting parties are required to pay variation margins depending on the price of the underlying asset in the market. But in case of options, the buyer of the contract after paying the premium does not bother about any other payments irrespective of the underlying asset's price in the market.

In futures trading, both the parties to the contract are required to deposit an initial margin with the broker, which in turn will be deposited with the exchange. This margin depends on the price volatility of the underlying asset. Exchanges generally set this margin equal to m + 3s, where ‘m' is the average daily absolute change in the value of the contract and ‘s' is the standard deviation of these changes measured over a period of time.

 

Posted Date: 9/10/2012 8:49:10 AM | Location : United States







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