Table of Contents
Chapter 1: What is Futures Trading
Chapter 2: How Futures Trading Works
Chapter 3: Futures Terminology
Chapter 4: Importance of Futures Market
Chapter 5: Limitations on Futures Trading
Chapter 6: Factors Affecting Futures
Chapter 7: Who Should Use Futures Trading
Chapter 8: How to Start Trading in Futures and Be Successful
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Chapter 5: Limitations on Futures Trading
– Restrictions on traded commodities
– Ticks
– Position limits
Chapter 5: Limitations on Futures Trading
Although futures are an important tool in maintaining stable prices in the economy, the risks in these trades are also quite high, especially because of leverage. Speculators, in particular, must be very cautious when investing in futures because of the unpredictability and potential of huge losses.
These risks are addressed to some extent by the various limitations and regulations that are imposed on futures trading.
Restrictions on Traded Commodities
Only certain types of commodities can be the basis for futures trading. The shelf life, the price volatility and the state of the commodity (processed or unprocessed) determines whether it can be used in a futures contract.
There is a minimum price movement (upwards or downwards) that can take place for futures of an underlying commodity. This is known as a tick. The contract liquidation prices are also regulated by price change limits.
A futures trader is also limited by the number of futures contracts he can hold. This regulation makes sure that no single investor can manipulate the market of a particular commodity.
In addition to these limitations, there are some specific government restrictions on futures trading. The Commodity Exchange Act governs futures trading in the US. The Commodity Futures Trading Commission (CFTC) is an independent agency, which enforces the regulations outlined in this Act. The CFTC also oversees the working of the National Futures Association. The NFA is a self-regulated body which sets out the code of conduct for futures traders to follow.
Brokers can only transact futures trades if they are registered with the CFTC and the NFA. This mandatory registration gives the CFTC some degree of control over how business is conducted within the broker’s offices. Legal action can be taken by the CFTA against brokers found violating the regulations. Investors may also be barred from futures trading if it is found that they have breached any of the legal regulations outlined by these regulatory bodies.
Next Chapter: Factors Affecting Futures