In Denmark, futures are traded on the NASDAQ Copenhagen exchange, alongside the national stock market. Until 1974, trading took place in the Børsen in Copenhagen, on a physical trading floor. NASDAQ, who also own the famous tech-heavy NASDAQ exchange in New York alongside a string of exchanges in other Nordic countries, has operated the market since 1996, which now trades fully electronically.
How are futures traded?
Futures are traded on an exchange, according to standardised contracts with fixed lot sizes. Different lots are traded based on price and expiry date, and the owner of a futures contract on its expiry date must take delivery of the underlying asset. Saxo Bank is one example of a well-known Danish futures broker, licensed to buy and sell futures on behalf of clients. In Denmark, futures are traded on the NASDAQ Copenhagen exchange, alongside many other assets.
Futures contracts differ greatly depending on their underlying. Two of the markets where they are most heavily traded are the forex and commodities markets – the great difference here is that delivery of physical commodities requires shipping and warehouse infrastructure, meaning this market works very differently to FX futures. Delivery in the case of FX simply means wiring a sum of a particular currency to the client account.
What are futures for?
Most people engaged in trading futures do so to lock in favourable prices. Imagine you own a lumber mill and need to estimate your operating expenses for the next year. You know you will be able to produce 1000 tonnes of wood, which you can currently sell on the futures market for the same month next year at €600. You will need to make a decision as to whether you want to take the risk of waiting, or lock in that price now. If your operating costs mean that you will lose money should the price drop even slightly, you will need to lock in the rate even if you expect the market to move up slightly. If you have more leeway, you may want to wait and hope the price increases before either locking in a more favourable rate or simply selling at the market price next year.
This is known as hedging. The price of the commodity is a variable risk for the producer, one that he seeks to reduce by locking in a given price. But who takes the other side of the trade? Futures can be both bought and sold, much like options, making them ideal for both hedgers and speculators. A speculator need not always have the connotation of ‘gambler’; in this case he might be a timber merchant who believes the price of the same wood will soon rise to €700, so buying the €600 futures contract now is an attractive trade, as he will be able to sell the purchased wood for a profit next year, if he is right. In some cases, two hedgers might be able to take both sides of the same trade.
Where do retail traders fit in?
Retail traders are almost always speculators. Because they are retail traders, the volumes involved are relatively small, and because they are speculating they do not have an urgent need to execute trades. Hedgers often have to hedge, regardless of market conditions – with a few exceptions, such as futures-trading hedge funds, speculators are never compelled to trade, but do so because they see opportunities.
As a day trader, you are a small market participant. That has both good and bad results: good, because your smaller trades should find ample liquidity and are unlikely to move the overall market, and bad, because you will find yourself paying relatively more in fees. One benefit of futures contracts is they are exchange-traded with a fixed spread, so you should not see as immense a markup as, for example, retail options traders.
Advice for Danish retail traders
Making an investment using futures can be appropriate for any number of reasons. In Denmark, the market includes hedgers, speculators, large and small companies and private individuals such as day traders. It is important to understand the market you are operating in, to be able to articulate your view on the price of the underlying asset, and to know why you want to use a futures contract to participate in it. The benefits of futures are considerable – omnidirectional trading, standardised exchange-traded contracts, and more – but they are also more complex products than spot FX or equities and require time and caution to properly understand.