The largest and most influential futures exchange in the world is the Chicago Mercantile Exchange, also known as the CME Group. A futures exchange is an auction market where participants buy and sell commodity futures and futures options contracts for delivery on specific dates in the future. Trading can occur either electronically or by openly shouting on the trading floor.
- The Chicago Mercantile Exchange (CME Group) is a publicly traded futures exchange.
- It resulted from the consolidation of four individual exchanges.
- CME Group trades in agricultural products, currencies, energy, interest rates, metals, stock indexes, and weather.
- Individuals can register to trade through the group.
The CME Group trades in agricultural products, currencies, energy, interest rates, metals, stock indexes, and weather. Its diversification resulted from a rollup of various exchanges over the years—CME, CBOT, NYMEX, and COMEX.
1848: Back to the Futures
In 1848, the Chicago Board of Trade (CBOT) opened its doors as the first futures exchange in the world. 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 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 2006, CME and CBOT signed a merger agreement. In 2007, the CME Group was established, creating a leading global derivatives marketplace.
In 1972, the CME introduced seven foreign currency contracts. 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—the 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, it 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. In 2012, the CME 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 CME has offices around the world, provides educational services, and continues to look for new acquisitions.
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.
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 data. The exchange has a vast history of price data for all products 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.
Trading on the CME
Individual investors can trade on the CME, and fees are charged to both sides of the trade (the buyer and the seller). Individual members pay the lowest fees. For example, a fee of $0.15 per agricultural future or options and $0.02 per weather future and options is charged to an individual. A non-member pays $0.69 and $0.16 for the equivalent open outcry trade. Volume discounts also apply. Trades made electronically using the Globex system are assessed higher fees.