Commodity Fundamentals: How to Trade the Precious Metals, Energy, Grain, and Tropical Commodity Markets

CHAPTER 3

The Mechanics of Trading

INTRODUCTION

Let us go back one step to explain in detail how your December cattle buy order was handled on the exchange floor. All buying and selling in the pit are done by open outcry; and every price change is reported on the exchange ticker system. Each firm has brokers in the different pits—that is trading areas for the purpose of buying and selling contracts.

When your order was received on the exchange floor, it was time-stamped and then given to a runner. This is a person who takes the order from the desk on the exchange floor and gives it to one of the brokers in the December cattle trading pit. This broker is then responsible to the brokerage firm to fill that order, if possible, at the stated price. After filling the order, he then has the runner return it to the desk, where it is time-stamped and transmitted back to the order desk at the brokerage house; and the filled order is reported to you.

MARGIN REQUIREMENTS

Futures trading requires you, the trader, to place margin with your brokerage firm. Initial margin is required, and this amount varies with each commodity. The minimum margin is established by each commodity exchange. Additional funds are needed when the equity of your account falls below this level. This is known as a maintenance margin call.

All margin calls must be met immediately. Normally you will be given a reasonable amount of time to comply with this request. If you do not comply, the firm has the right to liquidate ...