Chicago Mercantile Exchange – CME
The World's Leading Commodity Futures Exchange
A futures market is an auction market where participants buy and sell commodity futures and futures options contracts for delivery on specific dates in the future. Trading occurs by either open outcry or on an electronic basis. Perhaps the largest and most influential futures exchange in the world is the Chicago Mercantile Exchange (CME).
1848 Back to the Futures
In 1848, the first futures exchange in the world, the Chicago Board of Trade (CBOT) opened its doors. CBOT handled many agricultural products. Producers (farmers) and consumers were able to use the exchange to lock-in or hedge agricultural commodity prices. Until 1968, the CME/CBOT only traded agricultural commodities including grains such as corn, soybeans and wheat and livestock such as cattle and hogs. In 1969, the CBOT launched its first non-agricultural contract in silver. In 1972, the CME introduced seven foreign currency contracts. Then in 1975, the CBOT launched its first debt contract on Government National Mortgage Association Bonds.
Perhaps the largest and most actively traded futures contract in the world is the Eurodollar interest rate contract, which was born in 1981 on the CME. In 1982, the CME began trading contracts on stock index futures. Up until 1987 all futures trading was by open outcry and done in commodity pits. Traders would stand around in a circle at a designated space on the floor of the exchange called a pit buying and selling for themselves and clients. In 1987, the CME pioneered electronic futures trading through its GLOBEX platform. This new technology allowed the buyer and sellers to transact via a computer without the use of a floor broker in a commodity pit. It also extended the length of trading hours.
The Exchange Goes Public
The CME has always broken new ground, and in 2002, the exchange became the first U.S. exchange to become a publicly-traded and listed company. CME stock began trading on the New York Stock Exchange. While the CBOT and CME remained separate entities until 2006, the two exchanges merged under the name of the CME in 2007. The CME, as a public company, went on an aggressive program of acquiring other futures exchanges. In 2008, the CME acquired the New York Mercantile Exchange (NYMEX) that owned COMEX, the largest energy and precious metals futures exchanges in the world. The CME continues to expand and look for new acquisitions. Recently, in 2012 they acquired the Kansas City Board of Trade.
The mergers of various commodity exchanges under the umbrella of the CME have created tremendous economies of scale. The vast clearing platform of the CME and global reach of GLOBEX, the CME's electronic platform that trades virtually around the clock on business days, has created a mega-commodities exchange that shares costs over a myriad of products. The CME has offices around the world, provides educational services and remains in acquisition mode.
The Commodities Futures Trading Commission
The Commodities Futures Trading Commission (CFTC) regulates the CME as a Designated Contract Market (DCM). As such, the CME has certain self-regulatory responsibilities. Futures contracts are derivative instruments. The CME handles 3 billion contracts annually worth approximately $1 quadrillion based on recent company reports. The exchange provides a marketplace for buyers and sellers, bringing together institutions, companies, and individuals in a transparent environment to manage or accept price risk. Market participants include producers, consumers, traders, speculators, investors, arbitrageurs and any party who wishes to assume or transfer price risk in of the products offered by the exchange. After the passage of the Dodd-Frank Act, the CME also clears over-the-counter traded swap transactions via its clearing platform as does the IntercontinentalExchange.
When parties agree on a price to transact CME contracts, the exchange's clearinghouse becomes the contracting party to both buyer and seller and thus guarantees performance. It transfers credit risk from individual parties to the exchange itself. The CME manages Individual performance and credit risk of buyers and sellers via a margining system.
One of the other services provided by the CME is that they provide data. The exchange has a vast history of price data for all of the products that it offers for trading. The data includes actual prices, from high to low for each trading day. The exchange also maintains data on the volume of contracts traded and open interest. Open interest is the total number of long and short positions opened but not closed out.