Futures and options exchanges are associations of members organized to provide competitive markets and the facilities and staffs to support such markets. The first U.S. futures exchange was the Chicago Board of Trade, organized in the mid-nineteenth century. Fifty years later, nearly all major U.S. exchanges that operate today had been formed. During the last decade the number of futures exchanges throughout the world has rapidly increased to more than 70.
In the United States, exchange membership is available only to individuals, some of whom hold a membership for their firm. Members of an exchange may exercise their trading privileges as independent market-makers (so-called floor traders or locals) trading for their own accounts or as floor brokers executing customer orders. Exchange members who trade both for customers and for themselves are called dual traders.
Today, the greatest amount of futures and futures options trading is conducted by open outcry in exchange pits or trading rings. However, computerized futures and options markets have grown significantly during the last decade, both as the sole mode of trading and as an after-hours supplement to open-outcry trading during regular business hours.
In open-outcry trading, exchange members stand in pits making bids and offers, by voice and with hand signals, to the rest of the traders in the pit. Customer orders coming into the futures pit are delivered to floor brokers or dual traders who execute them according to the order's instructions. For example, a "market" order tells the broker to execute the order immediately at the prevailing price in the pit; a "limit" order specifies the price (or better) at which the order can be filled; and a "stop" order tells the broker to execute an order at the market price if a certain price is reached. Other types of orders specify the time of the trade (e.g., at the market's open or close) or allow a broker discretion in the execution. Orders also can indicate the period for which they are valid, e.g., a day, a week or until canceled.
