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Please, confirm my current understanding of how futures work. Let’s consider cash-settled futures for simplicity.

  1. The number of futures contracts (with identical parameters) is unlimited. New futures contract will be created by the exchange as long as there is a matching buyer and seller.

  2. Any person can sell a futures contract - one does’t have to own it first.

  3. If you own a contract you can sell it on the exchange. For other exchange players it will be completely opaque whether it is a newly created futures contract (created by the exchange) or an existing one, sold by its owner.

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Yes all three are true, but just to clear up some terminology (which may make it easier to understand):

You do not "buy" and "sell" futures contracts. You enter into a contract to either buy or sell some underlying commodity or financial instrument at a fixed price on a fixed date. So you do not need to "own" a futures contract toi "sell" it - what you're really doing is entering into a contract to sell something (which you also don't have to own at that time).

And yes, the "buying and selling" of futures is completely handled by the exchange - counterparties have no idea who is holding the other end of their contract, and all settlements are done through the exchange.

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#1 is not true. There are Position Limits applied by CFTC and the Exchange to each trader or each group of affiliated traders.

For example, NYMEX CL (Light Sweet Crude Oil Futures) has a Position Limit of 10000 contracts for each expiring month, applied by CME.

https://www.cftc.gov/IndustryOversight/MarketSurveillance/SpeculativeLimits/index.htm

https://www.cmegroup.com/market-regulation/position-limits.html

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  • Can you please confirm that #2 and #3 are true?
    – ambienthack
    Commented Jan 24, 2022 at 16:08
  • It's true to me, unless someone else thinks of some "edge case".
    – base64
    Commented Jan 24, 2022 at 16:10
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    Well, there are position limits per trader/institution, but the theoretical number of contracts in the market overall is limitless. If you want to trade a future, and aren't at a position limit of your own, you can probably do so.
    – D Stanley
    Commented Jan 24, 2022 at 17:17

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