The futures market has the function of price discovery because:
First, futures trading is highly transparent. The futures market follows the principles of openness, fairness and justice. For a long time, trading orders have been matched in highly organized futures exchanges. All futures contracts must be traded by public bidding on the futures exchange, and OTC trading is not allowed. The free quotation and open competition of the exchange avoid the fraud and monopoly that are easy to occur in one-to-one spot trading.
Second, supply and demand are concentrated, and the market liquidity is strong. There are many participants in futures trading, such as commodity producers, sellers, processors, importers and exporters and a large number of speculators. These hedgers and speculators gather together to compete through brokers, and the market liquidity of futures contracts is greatly enhanced, which overcomes the limitation of insufficient liquidity in the spot trading market and helps to form prices.
Third, the information quality is high. The formation process of futures price is a process of continuously collecting information, inputting information and generating price, and the quality of information determines the authenticity of futures price. Because most participants in long-term commodity trading are familiar with a commodity market, have rich business knowledge, extensive information channels and a set of scientific analysis and forecasting methods, they bring their own information, experience and methods to the market, judge, analyze and forecast the supply and demand and price trend of commodities in combination with their own production costs and expected profits, and quote their ideal prices. Competing with many rivals. The futures prices thus formed actually reflect the predictions of most people. It is authoritative and can truly represent the changing trend of supply and demand.
Fourth, the publicity of price reporting. The price declaration system of the futures exchange stipulates that the price of each new transaction reached by the exchange must be declared to members and their brokers in time and made public. Through developed media, trading companies can keep abreast of the trading situation and price changes in the futures market, judge the price trend in time, and further adjust their trading behavior. This constant adjustment of price expectation is finally reflected in futures prices, which further improves the authenticity of futures prices.
Fifth, the predictability of futures prices. Futures contract is a kind of forward contract, and the forward costs and forward factors contained in futures contracts will inevitably be reflected through futures prices, that is, futures prices reflect the expectations of many buyers and sellers for future prices.
Sixth, the continuity of futures prices. Futures price is a kind of price signal that constantly reflects the relationship between supply and demand and its changing trend. Futures contracts change hands quite frequently, so the constantly formed prices can constantly reflect the supply and demand situation and changes in the market.
Because the formation of futures prices has the above characteristics, it can accurately and comprehensively reflect the real supply and demand situation and its changing trend, which has a strong guiding role for producers and operators. Although many producers and operators in the world do not participate in futures trading and have no direct relationship with the futures market, they are making use of the prices found by futures exchanges and the market information disseminated to make their own production and operation decisions. For example, producers decide the production scale of commodities according to the changes of futures prices; In trade negotiations, the transaction price of bulk commodities is often determined on the basis of futures prices.