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. 

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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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