In traditional open outcry or floor-based trading, the initiation of a contract
transaction takes place on the floor of the exchange. Exact floor procedures
vary from market to market. Some exchanges, such as Euronext-Liffe for London
robusta (screen only) and ICE for New York arabica (floor and screen) and
robusta (screen only), have moved trading to a screen-based environment and
automated the entire process.In both floor and screen-based trading, there is
usually some form of open auction during which buyers and sellers make their
trades in public. Unlike the physical market, no privately arranged deals are
transaction is negotiated across the floor, providing all participants an
opportunity to respond to the current bids and offers. The negotiation is
concluded the moment a buyer and a seller agree with each other and the seller
registers the contract as a sale to the clearing house. Thereafter, the two
traders are responsible only to the clearing house. In this way, the clearing
house is a party to every transaction made by both buyers and sellers.
Automated or electronic trading is different but
maintains the transparency of open outcry trading in that all bids and offers
can be viewed by all participants. The computer system matches equivalent bids
and offers without human intervention. Once the orders are matched, the clearing
procedure is exactly the same as the old open outcry system.
Futures contracts are standardized in that all terms
are given, except the exact date of delivery, the names of the seller and buyer,
and the price. The market rules are legally enforceable contract terms and
therefore cannot be substantially altered during the period of the contract.
Every futures contract specifies the quantity, quality, and condition of the
commodity upon delivery, the steps to be taken in the event of default in
delivery, and the terms of final payment.