Global Leadership in the Financial Marketplace
CME is the largest and most diverse financial futures and options
exchange in the world - handling over 1 billion futures contracts
worth more than $660 trillion in a single year. Founded in 1898,
we serve the risk-management needs of customers around the globe
by offering the widest range of benchmark financial products available
on any exchange, traded via our CME Globex electronic trading
platform and on our trading floors. Our innovative products cover
major market segments - including interest rates, equities, foreign
exchange, commodities and alternative investment products - and
improve the way these markets work for customers everywhere.
The Birth of Futures
In the BeginningIn the mid-1840s, Chicago began to emerge as the market center for farmers in neighboring
states. At harvest time, farmers converged on the city to sell their grain. There was often so
much grain that the farmers had to dump a lot of it into Lake Michigan because there were
not enough buyers and no way to store it. This was unfortunate, because by the time spring
rolled around, grain was in short supply.
How did these extreme conditions of having too much grain and then not enough of it affect
grain prices? Letâ€™s take a closer look at the forces of supply and demand to give us a clue.
A Tomato Story
As an example, take a look at what happens to the price of tomatoes in the summer.
Farmers have so many tomatoes to sell that they must lower their prices to get people to buy
all of them. (Who can resist a bargain?) When prices fall because of excess supply, buyers
have the upper hand.
But what happens in the winter? People want tomatoes then just as much as in the summer.
But as you know, fewer tomatoes are available. Tomatoes canâ€™t be grown in the cold, so
most are grown in greenhouses (or these days, shipped from warm places). You canâ€™t grow
nearly as many tomatoes in a greenhouse as you can on a large farm, and shipping is more
difficult than having a supply nearby, so fewer tomatoes are brought to the market. People
who want tomatoes for their salads and BLTs during the winter find that there is more
demand for tomatoes than supply. When a lot of people want to buy something thatâ€™s not
readily available, they end up competing with one another to purchase what they want, and
in this process prices go up. People who still want tomatoes in the winter find that they must
be willing to spend more money to buy them. Prices of tomatoes rise to a point where a lot
of buyers drop out â€” tomato prices have become too expensive for them. The tomatoes go
to the people willing to pay that higher price, and get sold despite that higher price. Do the farmers now have the upper hand? They sure do! Demand for tomatoes in the
winter exceeds the supply. And this story shows you that the price of just about anything
has a lot to do with supply and demand, tomatoes included.
Back to the 1840s
Letâ€™s go back to see what happened with the farmers bringing their grain to Chicago each
year at harvest time. Even if theyâ€™d been able to store some of it they couldnâ€™t bring it to
the city in the winter because the rivers were frozen and they were unable to transport it by
barge. Then in the spring trails were so muddy that wagons would get stuck. Due to these
difficulties, there was an excess of grain in the fall and severe shortages in the spring.
Using what you have just learned about supply and demand, can you figure out what
happened to grain prices in the fall and in the spring? As you may have guessed, the excess
supply in the fall forced the farmers to lower their prices to induce the grain merchants to
buy their grain. But in the spring, when supplies were all but depleted, demand for grain was
so great that prices began to rise astronomically. By now, you must be asking yourself if there
wasnâ€™t a better way to handle this â€œfeast or famineâ€ cycle. As it turned out, there was.
Chicago Board of Trade
A few of the more savvy grain merchants decided to band together in 1848 to form an
organized grain exchange â€” the Chicago Board of Trade (CBOT). The CBOT provided a
central meeting place where buyers and sellers of grain could get together and conduct
business. With a formal exchange operating, wealthy investors saw an opportunity to build
huge silos to store the grain for year-round consumption. This helped smooth out the grain
supply problems and helped bring a certain measure of price stability to grain over the course
of the year.
CME (Chicago Mercantile Exchange)
The success of the CBOT inspired others to create exchanges that would assist the process
of buying and selling futures contracts on other farm products. In 1874, merchants formed
the Chicago Produce Exchange, later named the Chicago Butter and Egg Board, and then
in 1919 the CME (Chicago Mercantile Exchange). The commodities traded at the exchange
throughout these years were butter and eggs. Later, CME began offering trading in hides,
onions and potatoes.
During the 1950s, CME also began trading contracts on turkeys and frozen eggs. And in
1961 CME introduced a new contract that really put the exchange on the map â€” frozen
pork belly futures. Youâ€™ve probably heard of pork bellies dozens of times, and youâ€™re more
familiar with them than you realize. It is from pork bellies that we get bacon, a necessary
part of those BLTs.
In 1972, CME introduced financial futures, with the launch of eight currency futures
contracts. With its reputation for innovation firmly established, CME went on to become
a leading provider of options on futures and cash-settled futures contracts, and also
developed an electronic trading platform to permit trading nearly twenty-four hours a day.
Today, CME is the largest futures exchange in the U.S. and the second largest in the world,
trading a record 1.05 billion contracts in 2005. It still offers trading of futures contracts on
farm products. But these days, farm commodities comprise just one of the following six
basic types of CME futures contracts:
*CME Commodity Products: Cattle, hogs, milk, pork bellies, butter, lumber and
other commodity products.
*CME Foreign Exchange Products: CME Euro FX, CME British Pound, CME Japanese
Yen, CME Canadian Dollar and other FX products.
*CME Interest Rate Products: CME Eurodollars, CME Eurodollar FRA, CME Swap
Futures and other interest rate products.
*CME Equity Products: CME S&P 500, CME E-mini S&P 500, CME E-mini NASDAQ-
100, CME E-mini Russell 2000, CME S&P MidCap 400 and other equity products.
*CME Alternative Investment Products: CME Weather, CME Energy, CME Economic
Derivatives and CME Housing Index products.
*TRAKRS (Total Return Asset Contracts): Commodity TRAKRS, Euro Currency
TRAKRS, Gold TRAKRS, LMC TRAKRS, Rogers International Commodity TRAKRS.
WHAT EXACTLY ARE THESE CME FUTURES CONTRACTS?
*CME Eurodollar Time
Deposit Futures Eurodollars are U.S. dollars on deposit in banks outside the U.S. CMEâ€™s Eurodollar future
(an interest rate product ) contract reflects the offered interest rate for a 3-month $1 million deposit.
*CME Euro FX Futures The Euro is the currency of the European Union, introduced January 1, 1999. CME Euro Fx (a currency product) (foreign exchange) futures traded at CME are designed to reflect changes in the U.S.
dollar value of the Euro.
- CME Standard & Poorâ€™s The S&P 500 Index is based on 500 large-capitalization companies, representing about
500 Stock Index Future 80% of the value of all stocks listed on the New York Stock Exchange. CMEâ€™s S&P 500
(an index product dollar value of the Euro.
*CME Live Cattle Futures CMEâ€™s Live Cattle contract reflects trading of live cattle in units of 40,000 lbs. of 55%
(an agricultural product) Choice and 45% Select USDA grade live steers
*TRAKRS Non-traditional futures contracts are offered in collaboration with Merrill Lynch & Co., Inc.,
and are designed to provide market exposure to various TRAKRS Indexes, a series of marketbased
indexes of stocks, bonds, currencies, commodities and other financial instruments.
The indexes on which TRAKRS futures are based differ from most financial indexes in that
they are calculated on a total return basis, with declared dividends and other distributions
included in the index values.
*CME Weather Futures CME monthly and seasonal weather futures and options on futures are designed to enable
(an industrial index product) businesses to hedge risks associated with unexpected or unfavorable weather conditions.
These products are geared to an index of heating degree days (HDD) and cooling degree
Evolution of the Futures Markets
With this bit of history under your belt, letâ€™s take a look at how the futures markets evolved
and where futures trading stands today.
Up to this point, you know that centralized exchanges formed in Chicago in the 1800s and
that they helped to stabilize wild price fluctuations due to supply surpluses and shortages.
Providing a central trading location and improving storage, however, didnâ€™t eliminate all
For example, what about Mother Nature? Drought, severe frost and insect infestation and
other natural disasters influenced the supply of agricultural commodities. Disease could
kill herds of cattle. Then, as now, anything that affected supply and demand for a product
inevitably led to price uncertainty â€” for farm products and non-farm products as well.
For example, fear of rampant inflation and a possible recession can drive the stock market
into a tailspin. Similarly, political unrest or wars can create supply and trade imbalances and
can render the currencies of the countries involved more risky and less valuable in world
markets. The list goes on.
To try to cope with the other causes of price uncertainties, farmers and merchants began
making deals called forward contracts or cash forward sales.
A cash forward sale or forward contract is a private negotiation made in the present that
establishes the price of a commodity to be delivered in the future. The commodity does
not change hands until the agreed-upon delivery date. Farmers and merchants liked these
arrangements because they could lock in prices ahead of time and not worry about price
fluctuations in the interim.
Forward contracts were useful, but only up to a point. They didnâ€™t eliminate the risk of
default among the parties involved in the trade. For example, merchants might default on
the forward agreements if they found the same product cheaper elsewhere, leaving farmers
with the goods and no buyers. Conversely, farmers could also default if prices went up
dramatically before the forward contract delivery date, and they could sell to someone else
at a much higher price.
To resolve this problem, the exchanges began requiring each party in a forward transaction
to deposit a sum of money with a neutral third party â€” sort of like an escrow account in a
real estate transaction. This helped ensure that both sides would live up to the agreement.
If either defaulted, the other party would receive the money as reimbursement for any
inconvenience or financial loss.The exchanges also needed ways to address price changes resulting from unforeseen events
such as crop failure, drought, war, and so on. They found that developing standardized
contracts was helpful. A standardized contract specified a certain quality and unit of measurement
for each commodity being traded. Standardized contracts were interchangeable and
addressed everything except the price.
A private agreement to
buy or sell a commodity
at a specific price on a
COMPARING FORWARDS AND FUTURES
Nature of Transaction
Forward Contract = Buyer and seller make a custom-tailored
agreement to buy/sell a given amount of a
commodity at a set price on a future date.
Futures Contract = Buyer and seller agree to buy or sell a
standardized amount of a standardized
quality of a commodity at a set price on,
a future date.
Size of Contract
Forward Contract= Negotiable
Futures Contract = Standardized
Forward Contract = Negotiable
Futures Contract = Standardized
Forward Contract = Prices are negotiated in private by
buyer and seller, and are normally
not made public.
Futures Contract = Prices are determined publicly in open,
competitive, auction-type market at a
registered exchange. Prices are continuously
Forward Contract = Dependent on credit relationship
between buyer and seller. May be zero.
Futures Contract = Both buyer and seller post a performance
bond (funds) with the exchange. Daily price
changes may require one party to post
additional funds and allow the other party
to withdraw such funds.
Getting Out of Deals
Forward Contract = Difficult to do, so most forwards result
in a physical delivery of goods.
Futures Contract = Easy to do by entering into an opposite
transaction from that initially taken
(i.e., buy if you originally sold, sell if you
Forward Contract = State or Federal laws of commerce
Futures Contract = 3 tiers: Commodity Futures Trading
Commission, National Futures Association,
and self-regulation by the exchanges
Issuer and Guarantor
Forward Contract = None
Futures Contract = Exchange clearing house
Futures Contracts Standardized forward contracts evolved into todayâ€™s futures contracts. For example, a June
CME Live Cattle futures contract would require the seller to deliver 40,000 pounds of live
cattle of a certain quality to the buyer upon expiration of the contract.
A great advantage of standardized contracts was that they were easy to trade. As a result,
the contracts usually changed hands many times before their specified delivery dates. Many
people who never intended to make or take delivery of a commodity began to actively
engage in buying and selling futures contracts. Why? They were â€œspeculatingâ€ â€” taking a
chance that as market conditions changed they would be able to buy or sell the contracts at
a profit. The ability to eliminate a â€œpositionâ€ on a contract by buying or selling it before the
delivery date â€” called â€œoffsettingâ€ â€” is a key feature of futures trading. Actually, only about
3% of all futures contracts currently result in physical delivery, because most people clear or
eliminate their positions before the contract expires.
Every futures contract has a last day of trading, and all open positions must be closed out by
this Last Trading Day. For a physical delivery contract like CME Live Cattle, the open positions
can be closed out by making an offsetting futures trade or by making/taking physical delivery
of the cattle. For cash-settled futures contracts, positions can be closed out by making an
offsetting futures trade or by leaving the position alone and having it closed out by one final
mark-to-market settlement adjustment. With futures contracts being offset so frequently, a method was needed to match the
ultimate seller with the ultimate buyer. Exchange clearing operations evolved to record all
transactions and to document delivery from sellers to buyers. A clearing operation (at CME
itâ€™s known as CME Clearing) plays the role of third party to every futures transaction after
the trade has â€œcleared.â€ This means that CME Clearing first ensures that the buyer and seller
are in agreement as to price, quantity and expiration month of an order. Then, CME Clearing
steps in between and assumes the obligation of the seller against the original seller, and
assumes the obligation of the buyer against the original buyer. It is as if the seller had sold
to CME Clearing and as if the buyer had bought from CME Clearing. This practice ensures
the integrity of all trades. Do you see why?
A legally binding, standardized
agreement to buy or sell a
specifying quantity and quality
at a set price on a future date.
Some futures contracts, such
as the CME Live Cattle and
CME British Pound contracts,
call for physical delivery of the
commodity. Other futures
contracts, such as the CME
S&P 500 and CME Eurodollar
contracts, are cash-settled and
do not have a physical delivery
provision. If these contracts
are not liquidated by the Last
Trading Day, the position is
closed out by comparing the
positionâ€™s price against a
special Final Settlement Price,
and debiting or crediting the
How Do Futures Markets Benefit Society?
The futures markets can help manage the risks that are part of doing business. This can
mean lower costs to you as a consumer, because a well-run business is usually able to
bring its goods and services to market more efficiently â€” at a lower cost. The fewer risks
a business has to take, the lower the end price it needs to make a profit. Thatâ€™s really the
free enterprise system at its best, and futures markets play a vital role in this process.
Also, firms that manage their risks tend to be more dependable employers. If you work for a
company that deals with overseas customers or suppliers, for example, you have an interest
in how well your company copes with foreign exchange rates and how well it manages the
risk of fluctuating interest rates to protect its profits. Hedging with futures can assist with this
aspect of your employerâ€™s operations.
Naturally, if you work for a futures exchange or a firm involved in trading, futures markets
are particularly important to you. Futures markets are a part of the business scene in this
country. Used knowledgeably and appropriately, futures and options markets can be a
valuable asset in the business of doing business, which affects each of us.
Weâ€™ve been talking about the structure and function of U. S. futures exchanges, but the
picture would not be complete without taking a look at the world outside of Chicago and
In fact, while there are just nine futures exchanges in the U.S. today, there are more than
50 futures exchanges elsewhere. The exchanges outside the U.S. now do over 65% of global
futures business; U.S. exchanges do 35%. So although Chicago provided the prototype or
model for futures markets, you really have to look around the world to get an accurate
perspective of todayâ€™s futures trading industry.
For example, while open outcry on a trading floor is still the U.S. model, the majority of
trading on exchanges abroad is done electronically. Just as other countries may have initially
learned futures from Chicago, Chicago and other U.S. exchanges are now learning from the
rest of the world. It wasnâ€™t until the early 1990s that some major U.S. exchanges first began
allowing electronic trading of their products after their floors shut down each day. Now, at
CME, virtually all contracts trade at some point electronically each trading day, and specific
products (such as the CME E-mini S&P 500 and CME E-mini NASDAQ-100 futures contracts)
trade only electronically, never through open outcry on the trading floors.
All Exchanges Are Not Equal
Ownership of futures exchanges also varies around the globe. Most U.S. exchanges are
member-owned organizations. This is not the case, however, for CME, which â€œdemutualizedâ€
in 2000 and became a shareholder-owned corporation.
The stock of Chicago Mercantile Exchange Holdings Inc. can be bought and sold on the New
York Stock Exchange, much like General Motors and IBM. The ticker symbol is CME. If you
were to purchase shares in CME at the New York Stock Exchange, you would own Class-A
equity shares, which give you ownership, but not trading floor privileges. The Class-B shares,
however, are bought and sold through the exchange, much like membership â€œseatsâ€ were
when CME was a membership organization.
The only people allowed on the CME trading floor to trade and execute orders are holders of
Class-B shares in Chicago Mercantile Exchange Holdings, Inc. This privilege was once held by
members of the exchange, but since CME is no longer a member-owned institution, we no
longer officially refer to â€œmembersâ€ or â€œmembershipâ€ on the Exchange. The old terminology
still stays with us, however, and it is common (though technically incorrect) to refer to Class-B
shareholder floor brokers and floor traders (at CME) as â€œmembers.â€
In other countries, exchanges are often owned by a small group of banks or by a stock
exchange holding company. In some cases, futures exchanges or their holding companies
may even be publicly listed on a stock exchange. In other words, there are ownership
structures that give rise to different opportunities and advantages, other than those found
among most U.S. exchanges. And again, many other U.S. exchanges are giving serious
consideration to becoming publicly-traded corporations.
TOP 10 GLOBAL FUTURES EXCHANGES
Exchange Futures Contract Volume (rounded)
Chicago Board of Trade 489,230,000
Mexican Derivatives Exchange 210,355,000
Brazilian Mercantile and Futures Exchange 173,534,000
New York Mercantile Exchange 133,285,000
Dalian Commodity Exchange, China 88,034,000
Tokyo Commodity Exchange 74,447,000
National Stock Exchange of India 67,406,000
TOP 4 U.S. FUTURES EXCHANGES, 2004
Exchange Futures and Options Contract Volume
Chicago Mercantile Exchange 805,341,681
Chicago Board of Trade 599,994,386
New York Mercantile Exchange 161,103,746
New York Board of Trade 31,729,591
there is more work in progress too bad cant load the file up ;(