Chicago Mercantile Exchange

Last updated
Chicago Mercantile Exchange
Company type Subsidiary
Industry Business services
Founded1898
Headquarters Chicago, Illinois
Products Futures and options
Owner CME Group
Website www.cmegroup.com
Chicago Mercantile Exchange building Cme building aerial view.jpg
Chicago Mercantile Exchange building

The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an agricultural commodities exchange. For most of its history, the exchange was in the then common form of a non-profit organization, owned by members of the exchange. The Merc demutualized in November 2000, went public in December 2002, and merged with the Chicago Board of Trade in July 2007 to become a designated contract market of the CME Group Inc., which operates both markets. The chairman and chief executive officer of CME Group is Terrence A. Duffy, Bryan Durkin is president. [1] On August 18, 2008, shareholders approved a merger with the New York Mercantile Exchange (NYMEX) and COMEX. CME, CBOT, NYMEX, and COMEX are now markets owned by CME Group. After the merger, the value of the CME quadrupled in a two-year span, with a market cap of over $25 billion. [2]

Contents

Today, CME is the largest options and futures contracts open interest (number of contracts outstanding) exchange of any futures exchange in the world. The Merc trades several types of financial instruments: interest rates, equities, currencies, and commodities.

CME also pioneered the CME SPAN software that is used around the world as the official performance bond (margin) mechanism of 50 registered exchanges, clearing organizations, service bureaus, and regulatory agencies throughout the world.

Trading platforms

Trading is conducted in two methods; an open outcry format and the CME Globex electronic system. More than 90 percent of total volume at the exchange occurs electronically on CME Globex.

Open outcry

Operating during regular trading hours (RTH), the open outcry method consists of floor traders standing in a trading pit to call out orders, prices, and quantities of a particular commodity or its derivatives. Different colored jackets are worn by the traders to indicate what firm they are a part of. In addition, complex hand signals (called Arb) are used. These hand signals were first used in the 1970s. Today, however, headsets are also used by the brokers to communicate with the traders. The pits are areas of the floor that are lowered to facilitate communication, somewhat like a miniature amphitheater. The pits can be raised and lowered depending on trading volume. To an onlooker, the open outcry system can look chaotic and confusing, but in reality, the system is a tried and true method of accurate and efficient trading. An illustrated project to record the hand signal language used in CME's trading pits has been compiled. [3]

President George W. Bush at the CME (March 6, 2001) Chicago Mercantile Exchange (G. Bush).jpg
President George W. Bush at the CME (March 6, 2001)

CME Group announced in 2021 that it will permanently close most of its physical trading pits, including those for grain trading. They had been closed since March 2020 due to the outbreak of the COVID-19 pandemic. [4]

Electronic trading

Operating virtually around the clock, today the CME Globex Trading System is at the heart of CME. Proposed in 1987, it was introduced in 1992 as the first global electronic trading platform for futures contracts. This fully electronic trading system allows market participants to trade from booths at the exchange or while sitting in a home or office thousands of miles away. On 19 October 2004, the one billionth (1,000,000,000) transaction was recorded.

When CME Globex was first launched, it used Reuters' technology and network. [5] September 1998 saw the launch of the second generation of CME Globex using a modified version of the NSC[ clarification needed ] trading system, developed by Paris Bourse for the MATIF (now Euronext). [6]

Traders connect to CME Globex via Market Data Protocol (MDP) and iLink 2.0 for order routing.

Merger

On October 17, 2006, Chicago Mercantile Exchange announced a merger with the Chicago Board of Trade in an $8 billion deal. [7] [8] Shareholders of both companies approved the merger on July 9, 2007, [9] and the deal closed on July 12, 2007. [10] [11] The overarching holding company then launched as CME Group. [9] On January 13, 2008, electronic trading at the Chicago Board of Trade shifted onto CME Globex. [12]

Investigation

In 1984, the CME was investigated by the U.S. Government Accountability Office. During this investigation, it was realized that the open-outcry system could be abused. The GAO noted that the exchange made attempts to cut down on malpractice, but that it is likely that illegal activity still occurs. [13]

Products

Chicago Mercantile Exchange was known as the Chicago Butter and Egg Board when it was founded in 1898, and futures available through the exchange were initially limited to agricultural products. [14] [15] [16] In 1919 the Board was restructured and the name changed to Chicago Mercantile Exchange, which reflected a new focus on commodities beyond butter and eggs, including potatoes, onions, and cheese. [14] [15] [17] In 1972, CME introduced the first financial futures market, offering contracts on seven foreign currencies. [15] [18] By the 2000s, CME had expanded to offer four core financial instruments: commodities, foreign exchange, interest rates, and stock indexes. [14] [15] As of 2022, CME operates under CME Group, which offers a number of derivatives products, including commodities, equity indices, foreign exchange, interest rates, and weather. [19] [14] [20]

For example, as of 2017, agricultural contracts were offered on products such as wheat, corn, soybeans, and lean hogs. [21] In metal futures, the CME trades precious metals, base metals, and ferrous metals. [22] [23] [ better source needed ] The Chicago Mercantile Exchange is the only market for trading in weather derivatives. It launched its first weather products in 1999. Products include, but are not limited to: futures on rainfall, snowfall, hurricanes, and temperature. [24] [25]

See also

Related Research Articles

<span class="mw-page-title-main">Commodity market</span> Physical or virtual transactions of buying and selling involving raw or primary commodities

A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.

In finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price or delivery price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative.

A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. Futures exchanges provide physical or electronic trading venues, details of standardized contracts, market and price data, clearing houses, exchange self-regulations, margin mechanisms, settlement procedures, delivery times, delivery procedures and other services to foster trading in futures contracts. Futures exchanges can be organized as non-profit member-owned organizations or as for-profit organizations. Futures exchanges can be integrated under the same brand name or organization with other types of exchanges, such as stock markets, options markets, and bond markets. Non-profit member-owned futures exchanges benefit their members, who earn commissions and revenue acting as brokers or market makers. For-profit futures exchanges earn most of their revenue from trading and clearing fees.

<span class="mw-page-title-main">Chicago Board of Trade</span> Options and futures exchange in Chicago

The Chicago Board of Trade (CBOT), established on April 3, 1848, is one of the world's oldest futures and options exchanges. On July 12, 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form CME Group. CBOT and three other exchanges now operate as designated contract markets (DCM) of the CME Group.

<span class="mw-page-title-main">New York Mercantile Exchange</span> American futures exchange

The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City.

<span class="mw-page-title-main">Leo Melamed</span> American businessman (born 1932)

Leo Melamed is an American attorney, finance executive, and a pioneer of financial futures. He is the chairman emeritus of CME Group.

<span class="mw-page-title-main">London International Financial Futures and Options Exchange</span> Futures exchange located in London, UK (founded 1982)

The London International Financial Futures and Options Exchange was a futures exchange based in London. In 2014, following a series of takeovers, LIFFE became part of Intercontinental Exchange, and was renamed ICE Futures Europe.

An interest rate future is a financial derivative with an interest-bearing instrument as the underlying asset. It is a particular type of interest rate derivative.

E-mini S&P, often abbreviated to "E-mini" and designated by the commodity ticker symbol ES, is a stock market index futures contract traded on the Chicago Mercantile Exchange. The notional value of one contract is 50 times the value of the S&P 500 stock index; thus, for example, on June 20, 2018, the S&P 500 cash index closed at 2,767.32, making each E-mini contract a $138,366 bet.

<span class="mw-page-title-main">Open outcry</span> Communication method on the trading floors of stock exchanges

Open outcry is a method of communication between professionals on a stock exchange or futures exchange, typically on a trading floor. It involves shouting and the use of hand signals to transfer information primarily about buy and sell orders. The part of the trading floor where this takes place is called a pit.

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<span class="mw-page-title-main">Intercontinental Exchange</span> American exchange and clearing house company

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<span class="mw-page-title-main">CME Group</span> American financial derivatives company

CME Group Inc. is a financial services company. Headquartered in Chicago, the company operates financial derivatives exchanges including the Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, and The Commodity Exchange. The company also owns 27% of S&P Dow Jones Indices. It is the world's largest operator of financial derivatives exchanges. Its exchanges are platforms for trading in agricultural products, currencies, energy, interest rates, metals, futures contracts, options, stock indexes, and cryptocurrencies futures.

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U.S. Futures Exchange (USFE) was a Chicago-based, electronic futures exchange that terminated all exchange operations on December 31, 2008. On December 17, 2008, MF Global had announced USFE was for sale or would be closed by December 31, 2008. USFE was originally Eurex US who bought BrokerTec, but applied and received its own futures exchange license from the U.S. Commodity Futures Trading Commission. In October 2006, Man Group bought a majority share of Eurex US and rebranded the exchange U.S. Futures Exchange. It has been working to release a set of new products under a strategy of bringing innovation to the more than century-old derivatives business. The chief executive officer was John Spiegel.

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<span class="mw-page-title-main">Terrence A. Duffy</span> American businessman

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The Globex Trading System which was introduced in 1992, was the first global electronic trading system designed to handle both futures trading and options trading. It was developed by the Chicago Mercantile Exchange (CME) along with other technology companies and it was designed to work with the existing open outcry system at the exchange to help improve efficiencies and extend the hours of trading. Today, Globex, or "CME Globex", offers trading approximately 23 hours a day, five days a week.

References

Further reading

Notes

  1. ↑ "CMEgroup.com". Investor.cmegroup.com. Archived from the original on 2017-01-16. Retrieved 2012-09-22.
  2. ↑ Encyclopedia of American Industries. Gale. 2011. p. 2432.
  3. ↑ "CME Trading Pit Hand Signals History". tradingpithistory.com. Retrieved 16 August 2011.
  4. ↑ "CME permanently closes open outcry trading". World-Grain.com. 2021-05-10.
  5. ↑ "Deflating Globex: electronic exchanges". The Economisturl-access=subscription. 21 May 1994. Archived from the original on 24 September 2018. Retrieved 24 September 2018.
  6. ↑ "Reuters Dumped from Trading Service". Wired. 21 February 1997.
  7. ↑ "Chicago Exchange to Buy Rival for $8 Billion". The New York Times. October 17, 2006. Retrieved November 28, 2022.
  8. ↑ Lucchetti, Aaron; MacDonald, Alistair; Taylor, Edward (October 18, 2006). "Chicago Merc to Buy Board of Trade". The Wall Street Journal. Dow Jones & Company, Inc. Retrieved November 28, 2022.
  9. 1 2 Krasny, Ros (July 9, 2007). "CME buy of CBOT easily approved by shareholders". Reuters. Retrieved November 9, 2022.
  10. ↑ Krasny, Ros (July 12, 2007). "CBOT shares to be delisted at close of trade". Reuters. Retrieved November 9, 2022.
  11. ↑ "CME and CBOT Complete Merger Creating the Leading Global Financial Exchange". CME Group. July 12, 2007. Retrieved November 9, 2022.
  12. ↑ Saphir, Ann (2008-03-03). "Trading Places". Crain's Chicago Business. Crain Communications Inc.
  13. ↑ Simmons, Craig (1989), Chicago Futures Market: Initial Observations on Trade Practice Abuses, pp. 3–6
  14. 1 2 3 4 Peijie Wang (5 March 2009). The Economics of Foreign Exchange and Global Finance. Springer. p. 256. ISBN   9783662592717 . Retrieved November 28, 2022.
  15. 1 2 3 4 Jay P. Pederson, ed. (2006). International Directory of Company Histories. Vol. 75. US: St. James Press.
  16. ↑ Bennett A. McDowell (28 December 2010). The ART of Trading – Combining the Science of Technical Analysis with the Art of Reality-Based Trading. Wiley. ISBN   9781118039380 . Retrieved November 28, 2022.
  17. ↑ "Chicago Mercantile Exchange records, 1900-2000". University of Illinois at Chicago. Retrieved January 28, 2023.
  18. ↑ "TIMELINE-Key dates in the history of CME Group". Reuters. Retrieved January 28, 2023.
  19. ↑ Kumar, Rajesh (2014). Strategies of Banks and Other Financial Institutions: Theories and Cases. Elsevier. p. 140. ISBN   9780124171671 . Retrieved November 28, 2022.
  20. ↑ "Chicago Mercantile Exchange (CME)". dxFeed. Devexperts Inc. Retrieved November 29, 2022.
  21. ↑ Consuegra, Meliyara; Garcia-Verdugo, Javier (15 December 2016). "Measuring the functional efficiency of agricultural futures markets". Australian Journal of Agricultural and Resource Economics. 61 (2): 232–246. doi:10.1111/1467-8489.12196. S2CID   157882828.
  22. ↑ Mensi, Walid; Vo, Xuan Vinh; Kang, Sang Hoon (2022-06-01). "Upward/downward multifractality and efficiency in metals futures markets: The impacts of financial and oil crises". Resources Policy. 76: 102645. doi:10.1016/j.resourpol.2022.102645. ISSN   0301-4207. S2CID   247299380.
  23. ↑ Chicago Mercantile Exchange. "Metal futures and options". CME Group. Retrieved 19 March 2023.
  24. ↑ Benth, Espen, Jurate (2012). Modeling And Pricing In Financial Markets For Weather Derivatives. Singapore: World Scientific. p. 100.{{cite book}}: CS1 maint: multiple names: authors list (link)
  25. ↑ Bemš, Július; Aydin, Caner (18 November 2021). "Introduction to weather derivatives". WIREs Energy and Environment. 11 (3). doi:10.1002/wene.426. ISSN   2041-8396. S2CID   244457751.
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