# Understanding the Futures Market: Trading, Contracts, and Key Exchanges

![Futures Market](https://www.investopedia.com/thmb/DRwgI3OIsWaQXpgZJ-ZeiHNjxSY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/futuresmarket.asp-final-08988857fbd54626b58d198f1a72459c.png)

*— Investopedia / NoNo Flores*

> **Definition**
>
> A futures market is where financial products are bought and sold for delivery at a predetermined date and price in the future.

## What Is a Futures Market?

A futures market is an exchange specializing in futures contract, which are derivatives that lock in the future delivery of a commodity or security at a set price. It is an [auction market](https://www.investopedia.com/terms/a/auctionmarket.asp) for a variety of commodity and futures contracts. Originally, this trading occurred through the [open outcry](https://www.investopedia.com/terms/o/openoutcry.asp) of exchange participants and by hand signals in [trading pits](https://www.investopedia.com/terms/p/pit.asp). In the 21st century, [futures exchanges](https://www.investopedia.com/what-is-fmx-futures-exchange-8642848), like most markets, have become mostly electronic.

Futures are different from forward contracts, which are customized, over-the-counter (OTC) contracts with little oversight, whose terms are negotiated privately by two parties.

In the U.S., futures markets are largely regulated by the Commodity Futures Trading Commission (CFTC), with futures contracts standardized by exchanges. These markets include the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBoT), the Cboe [Options](https://www.investopedia.com/ask/answers/difference-between-options-and-futures/) Exchange (Cboe), and the Minneapolis Grain Exchange.

### Key Takeaways

*   Futures markets allow participants to buy and sell contracts for delivery at a specified future date.
*   These markets primarily operate electronically and are regulated, with major examples including CME and ICE.
*   Futures contracts help producers manage market volatility by locking in prices for future transactions.
*   Futures markets encompass a wide range of contracts beyond commodities, including financial products and interest rates.
*   The Commodity Futures Trading Commission (CFTC) oversees regulation of U.S. futures markets.

## Understanding the Fundamentals of Futures Markets

In order to understand fully what a futures market is, it’s important to understand the basics of [futures contracts](https://www.investopedia.com/terms/f/futurescontract.asp), the assets traded in these markets.

Producers and suppliers create futures contracts to avoid market volatility. These producers and suppliers negotiate contracts with an investor who agrees to take on both the risk and reward of a [volatile](https://www.investopedia.com/terms/v/volatility.asp) market.

Futures markets or [futures exchanges](https://www.investopedia.com/terms/f/futuresexchange.asp) are where these financial products are bought and sold for delivery at some agreed-upon date in the future with a price fixed at the time of the deal. Futures markets are for more than simply agricultural contracts, and now involve the buying, selling and hedging of [financial products](https://www.investopedia.com/articles/basics/06/invest1000.asp) and future values of interest rates.

Futures contracts can be created as long as open interest increases, unlike other issued securities. Futures markets, often growing larger when stock market outlooks are uncertain, are bigger than commodity markets and are key to the health of the financial system.

## Key Players in the Futures Market

Large futures markets operate their own clearinghouses, earning revenue from trading and trade processing. Some of the biggest futures markets that operate their own clearinghouses include the [Chicago Mercantile Exchange](https://www.investopedia.com/terms/c/cme.asp), the ICE, and Eurex. Other markets like Cboe have outside clearinghouses (Options Clearing Corporation) settle trades.

Most futures markets are registered with the [Commodity Futures Trading Commission](https://www.investopedia.com/terms/c/cftc.asp) (CFTC), the main U.S. regulator. Exchanges are usually regulated by the regulatory body in the country in which they are based.

> **Fast Fact**
>
> Futures market exchanges earn revenue from actual futures trading and the processing of trades, as well as charging traders and firms membership or access fees to do business.

## How Futures Markets Function: A Practical Example

For instance, if a coffee farm sells green coffee beans at $4 per pound to a roaster, and the roaster sells that roasted pound at $10 per pound and both are making a profit at that price, they’ll want to keep those costs at a [fixed rate](https://www.investopedia.com/terms/f/fixedcost.asp). The investor agrees that if the price for coffee goes below a set rate, the investor agrees to pay the difference to the coffee farmer.

If the price of coffee goes higher than a certain price, the investor gets to keep profits. For the roaster, if the price of green coffee goes above an agreed rate, the investor pays the difference and the roaster gets the coffee at a predictable rate. If the price of green coffee is lower than an agreed-upon rate, the roaster pays the same price and the investor gets the profit.

## The Bottom Line

Futures markets are exchanges where futures contracts are traded. The exchanges offer standardized terms for the securities, contract transparency, and price discovery. These markets, such as CME and ICE, operate largely electronically and can trade 24 hours a day. Futures markets are regulated primarily by the CFTC in the U.S., ensuring a secure trading environment. Futures markets are larger than commodity markets and a key component of the financial system. They offer a platform for hedging and speculation, which is particularly important for those dealing in agricultural and financial products.

> **Article Sources**
>
> 1.  CME Group. "[Clearing](https://www.cmegroup.com/clearing.html)."
>     
> 2.  ICE. "[Clearing](https://www.theice.com/about/exchanges-clearing)."
>     
> 3.  Eurex. "[Eurex Clearing](https://www.eurex.com/ec-en/)."
>     
> 4.  Cboe. "[Cboe Futures Exchange](https://www.cboe.com/us/futures/overview/)."