Who is the very first buyer of a futures contract? Don't tell me the first seller of course because then it's spontaneous to ask who did that seller bought from in the first place ?
2 Answers
Open interest represents the number of contracts that exist on any given day. There are 4 scenarios:
(1) If both parties to a trade are initiating a new position (one new buyer and one new seller) then open interest will increase by one contract.
(2) If both traders are closing an existing or old position (one previous buyer and one previous seller) then open interest will decline by one contract.
(3) If someone long an option sells to a new trader, open interest will not change (contract changing hands)
(4) If someone short an option buys from a new trader, open interest will not change (contract changing hands)
(1) applies to your question. There are no contracts in existence so a willing buyer and a willing seller agree on price and a contract is created.
answered Feb 6, 2019 at 16:38
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I think this person is asking if there is the equivalent of a market maker for futures. If so, is the market maker a known or knowable entity.– quidCommented Feb 6, 2019 at 18:17
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Perhaps. Or maybe when he said buyer and seller he meant buyer and seller. Commented Feb 6, 2019 at 20:38
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Yes, I wanted to know if there was an issuing authority of the futures. But now I get it that contracts are created in the market itself when one person enters into a long position and another in a short position. When they both square off, the contract or open interest offsets and falls by one. If any one of them squares off the position, in that case someone else in the market takes his place. Like if someone has shorted and wants to square it off, then he will buy it. For him to buy, someone in the market has to enter into the short position. One long position for a short. Got it! Commented Feb 7, 2019 at 18:49
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Max - The exchange acts as the intermediary. In the case of options, the market maker or an investor/trader could be the counter party. Commented Feb 7, 2019 at 18:56
"Buyer of a futures contract" is a bit misleading, although I realize this is the standard phrasing. You are not actually "buying" a contract - you are entering into a contract in which you are the buyer of a commodity. The other party in that contract is the futures exchange which also creates a contract between them and the "seller".
If you are buying to close out an existing short position, the exchange nullifies your original contract rather than creating a new contract that offsets the original one.
Whether the "seller" is opening or closing a position is of no consequence to you. The exchange handles all of this and keeps track of "open" contracts (as Bob's answer illustrates).
answered Feb 6, 2019 at 17:03
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Absolutely. I rephrase that the person entering into a position is a party to the contract. Still I couldn't assimilate when you said that 'the futures exchange also creates a contract between them and the seller'. Just to make my question more straightforward, assume you are the future exchange. You issued only one futures contract and I was the other party to it. I bought it and entered into the position. I held on to it till its expiry. I profited say 30 bucks on it. Who will pay me the price differential? You being the Exchange? Commented Feb 7, 2019 at 18:33
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@MaxMarshall If you are the exchange in that scenario, you would also originate (or close) a sell contract with another counterparty. If there's not another counterparty willing to sell, then no buy would occur. The exchange does not apy the difference - the other party does. The exchange is just a silent intermediary. There are "market makers" in some commodity markets that help facilitate this like in equity markets Commented Feb 7, 2019 at 18:49
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Crystal about it now. Grateful to you for your explanation. Thank you. Commented Feb 7, 2019 at 19:02