What it means
Before electronic trading, futures were traded in open outcry pits in which traders signalled orders with shouts and hand signals. Globex was introduced in the early 1990s as a way of extending trading beyond the pit hours, and over time it became the main venue for most contracts.
In the years since, the large majority of trading in the exchange's products has moved onto screens. The platform matches buyers and sellers automatically.
Orders arrive electronically from brokers, banks and trading firms, and the system pairs them according to price and the time the order was entered. The results are fast execution, transparent prices and access from different time zones.
The products traded include futures on stock indices, interest rates, currencies, energy, metals and agricultural goods. Companies use these contracts to manage risk, for example an airline hedging fuel costs or an exporter hedging currency, while speculators trade them in the hope of profit.
Prices on the platform are watched globally and often move news and sentiment before the cash markets open. For anyone dealing with futures, two numbers matter: the contract multiplier and the tick size.
The multiplier converts a price move in index points to dollars, and the tick is the smallest price movement allowed. For the popular E-mini S&P 500 contract, the multiplier is $50 per index point and the tick is 0.25 of a point, which is worth $12.50.
Electronic trading brings its own risks. Fast markets can move sharply in seconds, orders can fill at different prices from expected, and technical outages can interrupt trading.
Anyone using the platform should understand margin (the deposit required to hold a position), because losses are settled daily and can exceed the deposit. Costs are worth understanding before anyone starts.
Each trade carries a small fee to the exchange and the broker, and the difference between the buying and selling price (the spread) adds a further cost. For a hedging programme, finance teams add up these costs and compare them with the risk being removed.
In practice
Real-world examples.
Example
A US fund manager expects to receive $20,000,000 from investors next week. She buys stock index futures through the electronic platform today to gain market exposure straight away, and sells them as she buys the actual shares.
Example
An airline treasurer hedges part of next year's fuel needs by trading energy futures. The ability to trade in the evening, when news from overseas breaks, allows her to act before the next day's opening.
Example
A corn farmer in the Midwest sells futures through his broker to lock in a price for part of his harvest. The price he sees on screen guides his decision on how much to sell, and the contract settles against a published price.
Formula
Calculation
Profit or loss = (Exit price - Entry price) x Multiplier x Number of contracts (for a long position)
A trader buys 2 E-mini S&P 500 futures contracts at 5,000.00 index points. Each index point is worth $50. She later sells at 5,020.00, a gain of 20 points. The profit is 20 x $50 x 2 = $2,000. One tick is 0.25 points, worth 0.25 x $50 = $12.50, so a 20-point move equals 80 ticks, and 80 x $12.50 x 2 = $2,000, which confirms the answer. If the price had instead fallen by 20 points, she would have lost $2,000.Case study
Seen in the real world.
Harvest Moon Foods is an illustrative, fictional cereal manufacturer that buys large quantities of wheat. Its treasurer was concerned that a sudden price rise overnight, while the cash market was closed, would hurt the company's margins.
She opened a futures account and used the electronic platform to buy wheat futures covering about half of the expected needs. When news of a poor harvest overseas emerged late in the evening, prices rose 8% before the cash market opened, and the company's hedge gained about $240,000 against the higher cost of raw material.
The treasurer also set strict limits on position size and margin, because futures losses can be large. She reported the hedge result to the board each month, together with the cash needed to meet margin calls. The illustrative lesson is that round-the-clock access is valuable for hedging, and it demands discipline in controlling risk.
Watch out
Common mistakes.
- Believing electronic trading is risk free because it is automated, when prices can move very quickly and losses can exceed the initial deposit.
- Ignoring the contract multiplier, so that the dollar value of a price move is badly misjudged.
- Treating the platform as a place to buy shares, when it trades futures and options contracts instead.
Questions
People also ask.
What is Globex?
It is the CME Group's electronic trading platform for futures and options, and it operates almost around the clock on trading days.
What is a tick?
It is the smallest price movement permitted in a contract, and its dollar value depends on the contract's specifications.
Who can trade on it?
Access is usually through a broker or clearing firm, which also handles margin and settlement for the customer.
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