Price Discovery And The Futures Market

Price discovery is one of most basic economic principles. There is a point where the supply curve intersects the demand curve. This point is known as the value in which parties will exchange a good or service for a premium. The process of identifying this premium is known as “Price Discovery,” and is extremely relevant when trading on the futures market.

Using Modern Technology For Price Discovery 

More than a century ago, the open outcry system was the means by which buyers and sellers discovered the price of an asset. The open-outcry auction system allowed buyers to bid against one another until there was a clear winner.

Conceptually, this process of price discovery was relevant because buyers would not bid more than they were willing to spin. Thus, the auction was the “Price Discovery,” and the sale price was where the supply and demand curves crossed. Buyers and sellers used the auction system for:

  • Stocks
  • Bonds
  • Commodities
  • Currencies

Now, although there are still traders on the floor of popular exchanges like the New York Stock Exchange, price discovery is significantly different because of technology. Technology now allows trades to occur in a matter of seconds, involving participants around the world. The technology was born out of necessity, as markets were growing in size.

But since then, technology has also made trading more accessible. For instance, in 2017, more than 25 billion contracts were exchanged on the global options and futures markets. Investors can now trade volumes larger than ever while also maintaining depth-of-market and liquidity.

What Is Order Flow? 

Order flow is a term used commonly by investors in futures markets. It refers to the order in which buy and sell orders are placed in a market by active participants. Order flow is relevant to price discovery, especially in the digital marketplace, because it allows for real-time negotiation. Because of the digital market, traders can buy or sell orders instantly, which provides pinpoint price discovery.

For instance, order flow in the digital marketplace has resulted in tighter bid and ask spreads. Buyers and sellers are connected in real-time. However, the order flow could also result in more volatility, as a single transaction could cause a massive spike or dip. Although bid and ask spreads are tighter, the futures markets have also seen wider trading ranges. Experienced investors see this as an opportunity on which they can capitalize.

Lastly, order flow drives price discovery because of sustained supply and demand. When there is a steady order flow, there is substantial depth. There is never a shortage of buyers or sellers, which increases the likelihood of traders finding a desirable fill.

Learning More About The Futures Market 

Futures serve as an excellent way to diversify your portfolio. While price discovery is straightforward in concept, it can prove challenging to comprehend in practice. Learning the nuances of price discovery, order flow, and other relevant topics could do wonders for your portfolio. Investors should make sure that they understand these topics before entering the futures market.


US LAW requires trading and trading education accompanied to post legal disclaimers as to market and personal performance, as well as investment risk. Please carefully read and study the Legal section of this website and any agreement you sign. Any agreement to doing business with SP500Trader.com website or Delta Trading Group, Inc is verification that you have read, understand, and agree to the terms of risk associated with futures trading and financial investing as described.

Important Futures Trading Disclaimer

Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment. You must review customer account agreement prior to establishing an account.

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial. Carefully consider the inherent risks of such an investment in light of your financial condition. Though proper education, tools, and practice are necessary, they do not guarantee profitable results. 

Education Oriented

SP500Trader.com and the Delta Trading Group, Inc. are educational entities; be sure to consult with your financial advisers, brokers, and other professional services about the risk of trading. Though we offer a common language to learn about trading and risk, we are not a signal service. You must use your own discretion when doing any kind of trading in any financial market. SP500Trader.com and the Delta Trading Group, Inc. are not responsible for interpretation, opinions, or losses by its members, liaisons, instructors, mentors, vendors, contractors, or administration, as none of these entities can guarantee your success. 

Internet Trading Risks

There are risks associated with utilizing an Internet-based deal execution trading system including, but not limited to, the failure of hardware, software, internet connection, or services provided by third parties. Since SP500Trader.com and the Delta Trading Group, Inc do not control vendor signal power, its reception, or routing via Internet, configuration of your equipment or reliability of its connection. We are not be responsible for communication failures, distortions, or delays when trading via the Internet. 

Accuracy of Information

The content on this website is subject to change at any time without notice, and is provided for the sole purpose of assisting traders to make independent investment decisions. SP500Trader.com and the Delta Trading Group, Inc have taken reasonable measures to ensure the accuracy of the information on the website. The company does not guarantee its accuracy, and disclaims liability for any loss or damage which may arise directly or indirectly from the content or your inability to access the website, for any delay in, failure of the transmission, or the receipt of any instruction or notifications sent through this website.

Distribution

This site is not intended for distribution, or use by, any person in any country where such distribution or use would be contrary to local law or regulation. None of the services or investments referred to in this website are available to persons residing in any country where the provision of such services or investments would be contrary to local law or regulation. It is the responsibility of visitors to this website to ascertain the terms of and comply with any local law or regulation to which they are subject.

Slippage

Your broker may have a contractual agreement not to seek redress for slippage, it’s obligation to execute stop loss orders at the stop loss price or better, will not apply to limit and stop loss orders during hours when it is closed. This also does not include bad price spikes. Bad price spikes are removed from the price charts quickly to alleviate confusion.

How The E-Mini Changed The Game With Electronic Trading

In 1997, the wave of the future in trading was born. This was when E-mini exposed the market to a new breed of online trading, which paved the way for the current electronic market. Upon its debut over 20 years ago, very few understood just how much this mini version of the S&P 500 stock index futures contract would change the game with both equity and electronic trading.

A Revolutionary Creation

The E-mini contract was revolutionary at the time. It was created as a direct response to the Chicago Board of Trade (CBOT) acquiring the license to create a futures contract based on the Dow Jones Index, acontract geared to retail traders. This was a burst of sudden success for the CBOT at the time. Many were surprised that the CME did not acquire the contract, as it had the license for the S&P 500 for years.

From its earliest days, the E-mini S&P showed the world exactly what it could do, leading to its long-term popularity. Touted as the best contract ever made, the E-mini S&P show edit’s brilliance as being one-fifth the size of the standard S&P contract.This meant that traders could now either combine five E-mini contracts to equal one standard S&P contract, or divide one standard contract into five E-minis. Before E-mini was created, futures contrast consisted of only professional and commercial traders who could afford to fit the margin requirements.

A New Breed Of Traders

At the time of its debut, the bull market was larger than what some traders liked. This smaller size of the S&P meant that big contracts no longer had to be traded if one didn’t want to take the risk. It was a way to increase volume and still keep smaller traders in the market. Plus, it opened up futures to a whole new breed of online traders, proving that it was possible to have a product that was completely screen-traded. The success of E-mini S&P paved the way for all of the E-mini versions of the CMEGroup’s contracts and was embraced by other futures exchanges.   

Global Trading Capabilities

Not only did this revolutionary creation open futures trading to retail traders, it opened markets globally since all-electronic markets could be traded 24 hours a day, Monday thru Friday. This included the major markets of:

  • The US
  • Hong Kong
  • Japan
  • The UK

Instead of waiting for different markets to open, one could trade continually. This opened the exchange to a mix of market participants to help with liquidity. The more diverse the participants, the more vital and dynamic the trade. Though the smaller contract size appeals to retailers, the CFTC’s Commitments of Traders data shows a mix of asset managers, dealers, and leverage accounts that use the E-mini S&P. With benefits such as better granularity for speculation and hedging, faster fills, and screen-trading ability, it’s easy to see why the E-mini S&P still reigns supreme.

US LAW requires trading and trading education accompanied to post legal disclaimers as to market and personal performance, as well as investment risk. Please carefully read and study the Legal section of this website and any agreement you sign. Any agreement to doing business with SP500Trader.com website is verification that you have read, understand, and agree to the terms of risk associated with futures trading and financial investing as described.

TRADING DISCLAIMERS

Important Futures Trading Disclaimer
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment. You must review customer account agreement prior to establishing an account.

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial. Carefully consider the inherent risks of such an investment in light of your financial condition. Though proper education, tools, and practice are necessary, they do not guarantee profitable results.

Education Oriented
SP500Trader.com and the Delta Trading Group, Inc. are educational entities; be sure to consult with your financial advisers, brokers, and other professional services about the risk of trading. Though we offer a common language to learn about trading and risk, we are not a signal service. You must use your own discretion when doing any kind of trading in the any financial market. SP500Trader.com and the Delta Trading Group, Inc. are not responsible for interpretation, opinions, or losses by its members, liaisons, instructors, mentors, vendors, contractors, or administration, as none of these entities can guarantee your success.

Internet Trading Risks
There are risks associated with utilizing an Internet-based deal execution trading system including, but not limited to, the failure of hardware, software, internet connection, or services provided by third parties. Since SP500Trader.com and the Delta Trading Group, Inc do not control vendor signal power, its reception, or routing via Internet, configuration of your equipment or reliability of its connection. We are not be responsible for communication failures, distortions, or delays when trading via the Internet.

Accuracy of Information
The content on this website is subject to change at any time without notice, and is provided for the sole purpose of assisting traders to make independent investment decisions. SP500Trader.com and the Delta Trading Group, Inc have taken reasonable measures to ensure the accuracy of the information on the website. The company does not guarantee its accuracy, and disclaims liability for any loss or damage which may arise directly or indirectly from the content or your inability to access the website, for any delay in, failure of the transmission, or the receipt of any instruction or notifications sent through this website.

Distribution
This site is not intended for distribution, or use by, any person in any country where such distribution or use would be contrary to local law or regulation. None of the services or investments referred to in this website are available to persons residing in any country where the provision of such services or investments would be contrary to local law or regulation. It is the responsibility of visitors to this website to ascertain the terms of and comply with any local law or regulation to which they are subject.

Slippage
Your broker may have a contractual agreement not to seek redress for slippage, it’s obligation to execute stop loss orders at the stop loss price or better, will not apply to limit and stop loss orders during hours when it is closed. This also does not include bad price spikes. Bad price spikes are removed from the price charts quickly to alleviate confusion.

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