The Chicago Mercantile Exchange, also known as CME Group, is the largest and most influential futures exchange in the world. The commodity futures exchange is a marketplace where participants buy and sell futures contracts and options on futures for delivery on specific dates in the future. Trading can occur either electronically or through open outcry on the trading floor.
History
The CME Group trades in agricultural products, currencies, energy, interest rates, metals, stock indices, and weather. Its diversity resulted from the merger of several exchanges over the years – CME, CBOT, NYMEX, and COMEX.
1848: Back to the Future
In 1848, the Chicago Board of Trade (CBOT) opened its doors as the first futures exchange in the world. The CBOT dealt with many agricultural products. Producers (farmers) and consumers could use the exchange to secure or hedge prices on agricultural commodities.
Until 1968, the CBOT traded only agricultural commodities including grains like corn, soybeans, and wheat, and livestock like 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, CME Group was established, leading to the creation of a leading global derivatives market.
CME Achievements
In 1972, 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 CME.
In 1982, CME began trading contracts on stock indices. Until 1987, trading in futures was done through open outcry in commodity pits. Traders would stand in a circle in a designated area on the trading floor – the pit – buying and selling for themselves and customers.
Note: In 1987, CME introduced electronic futures trading through its Globex platform. This new technology allowed buyers and sellers to transact via computer without using a broker in the commodity pit. It also extended trading hours.
Exchange Goes Public
CME has always broken new ground, and in 2002, it became the first U.S. exchange to become a publicly traded company. CME shares began trading on the New York Stock Exchange.
While CBOT and CME remained separate entities until 2006, the two exchanges merged under the CME name in 2007. As a public company, CME embarked on an aggressive program to acquire other futures exchanges.
In 2008, CME acquired the New York Mercantile Exchange (NYMEX), which owns COMEX, the largest futures exchange for energy and precious metals in the world. In 2012, CME purchased the Kansas City Board of Trade.
Note: The mergers of various commodity exchanges under the CME umbrella led to the creation of massive economies of scale. CME has offices worldwide, provides educational services, and continues to seek new acquisitions.
Regulation
The Commodity Futures Trading Commission (CFTC) regulates CME as a designated contract market (DCM). Thus, CME has self-regulatory responsibilities. Futures contracts are considered derivative instruments.
CME handled over 4.9 billion contracts in 2021, reporting total revenues of $4.69 billion. The exchange provides a marketplace for buyers and sellers, bringing together institutions, corporations, and individuals in a transparent environment to manage or accept price risks.
When parties agree on a price for CME contracts, the exchange’s clearinghouse becomes the counterparty to both the buyer and seller, thereby ensuring performance. This shifts credit risk from individual parties to the exchange itself. CME manages the individual performance and credit risk of buyers and sellers through a margin system.
Another service offered by CME is data. The exchange has a vast history of price data for all products available 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 that are currently open and have not been closed.
Trading
On CME
Individual investors can trade on CME, and fees are charged on both sides of the transaction (buyer and seller). Individual members pay lower fees. For example, a fee of $0.15 is charged for agricultural futures or options and $0.02 for weather futures and options from individual members, as of March 2022. Non-members pay $0.69 and $0.16 for the equivalent transaction. Volume discounts also apply. Higher fees are charged for trades executed electronically using the Globex system.
Source: https://www.thebalancemoney.com/chicago-mercantile-exchange-808846
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