MF Global

"Though the working of the futures market may at first appear mysterious, the process of trading is actually quite straight forward. It is the skill of being able to trade the markets successfully that is the hard part!"

In this section we will take a step by step look at how a typical futures order is executed in the market. We will also examine some of the price information that is available on the market each day and its relevance for private traders.

Step one: placement of the order

When a trader decides to place an order the first thing they need to do is to speak to a licensed advisor. When this occurs, the advisor will record all the important details of the order such as the contract to be traded, the contract month, the price sought, the number of contracts required and of course whether the order is to buy or sell.

Once the advisor does this, the order is then entered into SFE's screen dealing system, SYCOM ? *. From there, the order can be released to the open market for execution.

At the same time as the original order is given, the trader, may also wish to place a separate order known as a 'stop loss'. This is an order that is opposite in direction to the original order (i.e. If the original order was to buy, the stop loss would be to sell. If the original order was to sell, the stop loss would be to buy).

The primary purpose of a 'stop loss' order is to instruct the broker to get the trader out of the market should prices move adversely. Though there is no guarantee that a broker will be able to get the trader out of the market at the exact stop loss level, the use of stops is one way of helping to keep losses to a minimum. For this reason, they are widely used and are highly recommended especially for new traders.

Order Types
The type of order that a trader uses, will reflect both their own trading style and their overall market objectives. Note that interpretation of orders may vary slightly from one broker to another and hence care should be taken to ensure that no ambiguity exists. Outlined below are some typical orders and their common interpretations.

Note: All examples below use the SPI contract
* SYCOM is a registered trademark of the Sydney Futures Exchange Limited

Limit Order: "Buy 10 June SPI at 2700"
An order that can be executed only at a specified price or better.

Market Order: "But 10 June SPI at Market"
An order to be executed immediately at the current market price.

Order at Best: "Buy 10 June SPI at Best"
This order is essentially a market order, but provides the broker with some discretion in terms of time and price.

Stop Limit Order: "Buy 10 June SPI on stop 2700 limit 2705"
This order means that if the market trades or is bid at or above 2700, the order is to be executed provided that not more than 2705 is paid. The client takes the risk that the order, or part of it, may not be executed if the market rises rapidly from 2700.

Spreads: "Buy 10 June SPI, Sell 10 Sept SPI at a differential of 20 points"
An order to simultaneously buy and sell at least two different contracts at a quoted price differential; sometimes three or more 'legs' are involved.

On Stop Order: "Buy 10 June SPI on stop 2700"
An order that becomes a market order only when the market trades at a specified price; also called a 'stop-loss' order. A buy stop is placed above the level where the market is currently trading ie. "Buy 10 June SPI on stop 2700 this order is placed when the last traded price is below 2700 - this means that the broker will "buy 10 at market" when the market trades up to, or above 2700.

A sell stop is the reverse of the buy stop. A sell stop is placed below the level where the market is currently trading.

Market on Open (MOO) "Sell 10 June SPI on open"
An order to be executed as soon as possible, following the opening of a market. An order to "Sell 10 June SPI on open" would be executed at market immediately following the opening.

Market on Close (MOC) "Sell 10 June on close"
An order to be executed within the last minute of trading.

Validity of orders

Day Only:

Unless otherwise specified, all orders are 'day only' orders - that is, they lapse if not filled by the end of the day trading session. Note, if you wish the broker to continue working your order overnight, you must indicate this to the broker.

One Cancels Another (OCO):
This instruction is used together with two orders, so that upon the execution of one order, the other order is automatically cancelled.

As orders can vary between brokers, traders should contact their broker for further information on orders.

Step two: execution of the trade

As mentioned earlier, all futures and options contracts at SFE are traded on SFE's screen dealing system, SYCOM. SYCOM matches buy and sell orders using the priorities of price and time. This ensures that the best price is always traded and that access to the market is equal regardless of whether the user is a large institutional investor or a small retail trader.

Depending upon the type of order an investor uses, it may take only a few seconds for the order to be executed or 'matched' in the market.

Step three: notification of the trade

As soon as an order is filled, the advisor will automatically contact the trader who placed the order to confirm the details of the transaction.

The following day, the broker will then send out a trading statement or contract note that provides details of all the trades executed on the traders behalf.

As well as a contract note, the broker will also send out each month, an account statement. This provides information on opening and closing cash balances, deposits, credits and withdrawals, details of any contracts traded or open as well as any outstanding calls for deposits and margins as well as interest earned.

How Can I Be Sure I Got The Best Price?
One of the major pluses of futures markets is that they provide equal access to all market participants.

This means that irrespective of whether the investor is a large financial institution or a private trader, the investor has equal entitlement to all prices traded.

The price that an investor receives when they place a futures order, obviously depends upon what type of order was used and the market conditions that prevail at the time.

One of the ways to avoid uncertainty is to use a limit order. This ensures the trader will never buy at a price higher or sell at a price lower, than the price they have specified. While limit orders provide certainty, it needs to be remembered that a broker can only ever trade at the prices available in the market. For this reason, it may be necessary for a trader to revise their limit price either up or down in order to attract a counterparty willing to deal.

If speed is of the highest priority, the most appropriate order is often a 'market' order. While using this order will ensure that the volume of contracts sought will be obtained, the investor must be prepared to deal at whatever prices are currently available in the market. Depending upon market liquidity, these may vary considerably.

Tracking the trade

One of the major decisions that new traders have to make is which data source they will use to support their trading. Price information on futures and options contracts can be found on a diverse range of media including the Internet, pagers, television and dial-up services. Which source a trader decides to use, will be guided by their trading style and budget.

For those who trade the market on a very short-term basis (ie: day traders and short term position takers) it may be necessary to gain access to 'real-time' price data. This data shows market changes as they occur thereby allowing traders to exploit short-term trading opportunities. A variety of information vendors publish this data electronically via pagers or computers and some brokers will even display it as part of Internet based order entry systems that they offer. Owing to strong competition amongst information vendors, the cost of real-time data has fallen sharply in recent years. Prospective traders are advised to speak to a range of information vendors before making a final decision as to what service they should choose.

Historical Data
Historical daily data files for all of the SFE contracts are available free of charge from the SFE's website. The data includes first, high, low, last, settlement price, volume and gross open interest.

End of Day Data
Daily data is posted to the SFE web site each evening. The data includes first, high, low, last, settlement price, volume and gross open interest for the day's trading.

Delayed Intra-day Data - www.sfe.com.au
The SFE website offers free 15-minute delayed snapshot price and volume for Futures contracts for current trading.

How to read published prices
Finding futures and options prices is quite easy but it is essential that investors are able to understand what they see. Below is a printout of futures which includes statistics that are generally found in newspapers.

All Ords SPI (A$25 x SPI)

TOTALS: Night Vol. 1129 Day Vol. 9751 Pre 0/P 277787

In the daily newspaper listings, the tables reflect prices and volumes for the previous trading day. Open interest figures are published on a two-day lag.

Below is an explanation of what the various fields mean:

Internet Services - Is a dial-up modem, internet or pager service best?

In addition to newspapers and dedicated third-party information screens, information on the market can be received via the internet, a pager or via a modem dial-up service. The advantage of the internet is that investors can be permanently connected and instantly updated instead of having to dial up and connect to the service every time a quote is required. Investors can also access the service from any location in which the internet can be connected.

When selecting an Internet service some of the features to look out for include:

• Are dynamic updates provided?
• What news services, if any, are provided?
• Is a portfolio manager available?
• Does the system show market depth?
• Is a technical analysis package included? If so, what types of analysis are shown?
• Are there any special requirements to connect to the system?
• How 'user friendly' is the system?
• Can news items, charts, etc be downloaded?
• What are the PC hardware, browser requirements to access the system?
• What help, both online and via manuals is available?
• What is the reliability/cost of your internet provider like?

Pager services
The obvious benefit of using a pager as opposed to the internet is portability. With a pager, an investor doesn't need to be sitting in front of their PC to receive live information. The service can be with them all the time, providing up to the second alerts on market price movements as soon as they occur. When considering a pager service some of the features to look out for include:

• Speed of update
• Type of data for example: time, last, change, bid, ask, high, low, open, close, open interest
• Extra features of the unit
• Ease of use After sales support

Dial-up services
Dial-up services are generally used to download end-of-day data for technical analysis programs. Features to look out for include:

• volume of data
• information on available times for access
• Ease of dialing in does service include software to assist download
• software package compatibility
• Is the network site dedicated to financial updates?
• Can I download the information to my PC?
• Is the data feed end-of-day, intra-day or both?
• How often are prices updated?
• What information is available from international exchanges?
• Can I get after sales support locally?

Trading Software Packages
There is a huge array of software suppliers through Australia and world-wide. Your Trading Edge (YTE) and the Australian Technical Analysis Association (ATAA) produce a Computerised Trading Guide on an annual basis. The guide provides a survey of trading software and data suppliers available in Australia with product listings, specifications and contact details.