who determines amounts of futures contracts available for trade?

[scriabinop23]

Quote from z32000:

but a lot of people buy the "market price"...

in stocks... say you have stock XYZ that has 3 shares total at $10 each...

because there are only 3 shares.... it would look something like this...

first bidder will get share number 1 at $10
second bidder will get share number 2 at $10
third bidder will get share number 3 at $10

but since there is no share number 4... the next round
would be... share number 1 will be worth $11
and then share number 2 will be worth $11
then share number 3 will be worth $11

then so on... because there is only a limit of 3 shares....


but in futures, if there are unlimited contracts and a lot of people just hit the "buy market" button... it must mean that the market maker tends to control the bid and ask price pretty much most of time unless people set buy and sell limits...
someone please correct what I'm not seeing...

I understand that in stocks there is a market maker just like there is in futures, but I can see how the market maker has no choice but to raise prices when there is a limited supply of stocks...
but if there isn't a limited supply of contracts and everyone just hit's "buy market"... how is the price determined ?
(or the bid and ask)

buy market in futures = buy at whatever the ask is.

If you buy 1000 ES futures above fair value, an arbitrager can come in and buy the underlying basket of S&P stocks until its value equals the 1000 ES he sold to you.

futures are merely agreements between the buyer and seller where the winner pays the loser. the exchange acts as a middleman and takes care of this guarantee (loser pays exchange, exchange pays winner.. and vice versa).

in stocks, yes there are supply issues - but in most cases large floats make the differences more academic discussions than practical ones.


price is determined in both cases by the buyer and seller, sometimes the market maker (in stocks sometime), sometimes not (in stocks after hours or if you put a limit order more competitive than the MM or specialists bid/ask).

by the way, altho there is no market maker in futures markets, they go by a different name (and usually offer less competitive price) - arbitrager.

 

[z32000]

i guess the real question is, how does globex create a bid and ask prices?

So if there is no market maker but there are arbitrager... are they forced to bring the spot and futures price together (are they hired to do this)?




I was reading this up on investopedia.com

http://www.investopedia.com/ask/answers/06/futuresconvergespot.asp

it says

Why do futures' prices converge upon spot prices during the delivery month?

It's a fairly safe bet that as the delivery month of a futures contract approaches, the future's price will generally inch toward or even come to equal the spot price as time progresses. This is a very strong trend that happens regardless of the contract's underlying asset. This convergence can be easily explained by arbitrage and the law of supply and demand.

For example, suppose the futures contract for corn is priced higher than the spot price as time approaches the contract's month of delivery. In this situation, traders will have the arbitrage opportunity of shorting futures contracts, buying the underlying asset and then making delivery. In this situation, the trader locks in profit because the amount of money received by shorting the contracts already exceeds the amount spent buying the underlying asset to cover the position.






I did not quite understand the last sentence... "In this situation, the trader locks in profit because the amount of money received by shorting the contracts already exceeds the amount spent buying the underlying asset to cover the position."

 

[Tums]

Quote from z32000:

but a lot of people buy the "market price"...

in stocks... say you have stock XYZ that has 3 shares total at $10 each...

because there are only 3 shares.... it would look something like this...

first bidder will get share number 1 at $10
second bidder will get share number 2 at $10
third bidder will get share number 3 at $10

but since there is no share number 4... the next round
would be... share number 1 will be worth $11
and then share number 2 will be worth $11
then share number 3 will be worth $11

then so on... because there is only a limit of 3 shares....


but in futures, if there are unlimited contracts and a lot of people just hit the "buy market" button... it must mean that the market maker tends to control the bid and ask price pretty much most of time unless people set buy and sell limits...
someone please correct what I'm not seeing...

I understand that in stocks there is a market maker just like there is in futures, but I can see how the market maker has no choice but to raise prices when there is a limited supply of stocks...
but if there isn't a limited supply of contracts and everyone just hit's "buy market"... how is the price determined ?
(or the bid and ask)

you are correct. when there are more buyers than seller, the price will momentarily goes up above "fair value".

The arbitrageur will step in to return the price to equilibrium.

http://en.wikipedia.org/wiki/Arbitrage

 

[gnome]

Quote from z32000:

"... i guess the real question is, how does globex create a bid and ask prices?..."

Globex doesn't "create bid and ask prices", they only display current bids and offers.... which are limit prices from other investors.

If you want to buy, you can either set a limit price or buy "at the market"... in which case you're taking the currently lowest offered price.

 

[TraderRobb]

Perhaps the vision of a cattle auction will enlighten. The auctioneer being the posted prices on globex.

 

[z32000]

Quote from gnome:

Globex doesn't "create bid and ask prices", they only display current bids and offers.... which are limit prices from other investors.

If you want to buy, you can either set a limit price or buy "at the market"... in which case you're taking the currently lowest offered price.

how is the lowest offered prices created though???

 

[Tums]

Quote from z32000:

how is the lowest offered prices created though???

by the willing seller who wants to sell it at that price at that time.


edit: if there were no willing sellers, there would be no offer quoted.

 

[z32000]

Quote from optioncoach:

stop feeding the troll...

some people just seem to know everything...

 

[z32000]

Quote from Tums:

by the willing seller who wants to sell it at that price at that time.

but how does a bid and ask price get created if there are unlimited supply of contracts that can be created...

it's not like stocks where there is a limited supply which causes the round of stock prices to move up starting with the lowest priced stock.

 

[Tums]

Quote from z32000:

but how does a bid and ask price get created if there are unlimited supply of contracts that can be created...

it's not like stocks where there is a limited supply which causes the round of stock prices to move up starting with the lowest priced stock.

a willing buyer will assess the market potential, and enters a willing bid through his broker,

a willing seller will assess the market potential, and enters a willing offer through his broker.

If the bid price and the offer price matches, a contract is created.