Traders in the UK have access to many different futures markets regulated by the Financial Conduct Authority (FCA). We will explore how these contracts are traded on UK exchanges and what factors traders need to consider when trading them.
What are futures contracts, and how do they operate?
A futures contract is a legally enforceable agreement to buy or sell an asset at a specified price. Futures contracts are formalised so that they may be traded on an exchange. The underlying asset may be anything from commodities such as gold or oil to financial instruments like foreign currency or Treasury bonds.
When you buy or sell a commodity futures contract, you agree to exchange the asset at a specified price on a date in the future. You will lose money if the underlying asset’s price falls against you, and you will make money if the underlying asset’s price appreciates.
Because these contracts are traded on an exchange, they are highly regulated, and it protects both buyers and sellers and helps ensure that all trades are conducted relatively; click for more info on futures and futures trading.
Who trades futures contracts, and why do they do it?
Various types of market participants trade futures contracts for various reasons. Some market participants trade futures contracts to hedge against price movements in the underlying asset, while others trade them to profit from anticipated price movements.
Banks and insurance companies often use futures contracts to hedge against fluctuations in the prices of the underlying assets. For example, if a bank holds a large inventory of gold, it may purchase gold futures contracts to protect the value of its holdings. Similarly, an insurance company might purchase futures contracts on livestock to hedge against the possibility of rising meat prices.
On the other hand, speculators seek to profit from market price movements. They do this by buying or selling futures contracts to predict how prices will move in the future. If it’s believed prices will rise, they will buy contracts; if it’s believed that prices will fall, they will sell contracts. If their predictions are correct, they will make a profit; if their predictions are incorrect, they will incur a loss.
What are the benefits of trading futures contracts in UK marketplaces compared to other markets worldwide?
The UK futures markets offer traders a unique set of benefits compared to other markets worldwide.
First, the UK’s time zone is convenient for both European and American traders. Second, the UK’s regulatory environment is very favourable to investors, providing greater protections than many other jurisdictions. Third, the UK’s tax regime is also very advantageous to investors, as capital gains and income from trading are taxed at lower rates than in many other countries.
Finally, the UK’s financial infrastructure is exceptionally well developed, providing efficient and reliable execution of trades. Taking these factors into consideration makes the UK an attractive destination for futures trading.
How does Brexit impact the futures market in the UK, and what implications could this have for traders and investors moving forward?
Brexit has had a significant impact on the futures market in the UK. One of the most significant implications has been the sharp increase in volatility. It has been driven by many factors, including the uncertainty around the future relationship between the UK and the EU and the relatively tight timeframe for negotiation.
It results in a marked increase in hedging activity in the UK futures market. It has led to higher volumes and increased liquidity, likely to continue short to medium term.
Brexit also presents many challenges for traders and investors moving forward.
One of the biggest challenges is navigating the regulatory landscape. The UK’s decision to leave the EU will significantly impact financial regulation, and it is still unclear what this will mean for traders and investors.
There is also a risk that Brexit could lead to fragmentation of the UK futures market as trading activity shifts to other European exchanges. This would have significant implications for liquidity and price discovery.