Ever since it was conceived in ancient Mesopotamia around 1750 BC, the trade of standardized futures contracts changed surprisingly little. In order to conduct your business, you would usually have to descend to the so-called “Pit” (the facility where the trading is conducted) and scream your way through waves of competitors.
The recent development of futures trading platforms is quickly making this ancient way of trade obsolete. Let’s take a look at some of the positive and negative changes being brought to the table.
Speed and volatility
One of the most noticeable developments we can pinpoint as a direct result of digitalization of futures markets is the speed in which the transactions are enveloping. Once the orders are placed and all the necessary conditions are met, the trades are executed in a matter of seconds. This lighting speed of trading has its share of drawbacks, though. For instance, the ability to quickly place a high volume of huge orders on the market opens up space for extreme swings in pricing and makes the environment very volatile.
As of recently, the futures trading process was needlessly convoluted. You were expected to call your broker to place an order. Then, the broker would order clerks to contact the floor broker, and once the order was set you would have to wait for feedback to find its way back through this stack of middlemen. The digital trading platforms are effectively eliminating all the unnecessary parties out of the equation streamlining the process and lowering the trading fees as a result.
A more democratic trading environment
As a result, the futures market, which was largely oriented toward professional traders and various investment trusts, now becomes more open to the wide masses. This makes futures market a part of the digital wave in which every man with basic economic literacy is capable to track live gold price on different markets, quickly exchange stocks and take participation in shaping the digital markets regardless of the background. Such trading environment is much more democratic and welcoming to newcomers.
The rise of day trading
Day trading can be described as the strategy of buying and selling different assets (in this case, futures contracts) within the same 24-hour time frame. All positions are closed by the end of the day, and no positions remain overnight. In most cases, the next day sees the futures open with much more different prices than they had when they closed the previous day, which gives incentive to new orders. The day trading of futures assets would be virtually impossible without the existence of digital trading platforms.
The rise of new threats
By becoming more open to various parties futures markets also expose themselves to the various threats that were, as of recently, considered marginal. The two most prominent issues are:
- Lack of transparency – The electronic transactions effectively remove identity and with it, the accountability out of the trade. The market can be simultaneously hit by a large number of high orders with no one knowing who’s responsible for price fluctuations. This lack of transparency covers the futures market with unnecessary shade of fear and anxiety.
- Data breaches and other disasters – Data breaches occur too many times during the day to even keep count. When they hit hard, they can knock $350 million off the sale price of companies like Yahoo. The futures markets are quickly moving the bulk of their transactions in this vulnerable environment. This process is evolutionary and can’t be turned back, but the threats can be successfully fought off only if we are aware of their existence.
As we can see, the introduction of digital trading platforms in the world of futures markets hasn’t only changed the way in which the transactions are happening, but their very DNA. Some of the changes are for the better, some are for worse. Our job is to do our best to understand both these aspects so the market can continue to thrive.