In the previous parts of this series of articles, we wrote about the world's largest stock exchanges: the NYSE, the NASDAQ, the LSE, and the TSE. Today, however, we are going to write about the world's largest exchange of another type – the Chicago Mercantile Exchange. It is a commodity exchange, and in many important ways it is different from stock exchanges.
On stock exchanges, the main assets being traded are stock shares and a number of other securities, such as bonds and fund shares. Such exchanges include the NYSE, the NASDAQ, and the LSE.
On commodity exchanges, the main assets being traded are commodities such as raw materials and agricultural produce, as well as their derivatives (futures and options). Currency derivatives and stock indices are also frequently being traded there. Commodity exchanges include the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and the London International Financial Futures and Options Exchange (LIFFE).
There also exist mixed changes that trade all types of assets. One such exchange is the Moscow Exchange.
The CME's Place in the Global Economy
The CME is the world's first commodity exchange. Unlike stock exchanges, it cannot be evaluated by such criteria as total market capitalization or the number of listed companies. However, one can still estimate the exchange's trading volume, and it is enormous. The monthly trading volume on the CME exceeds $2T, which is more than that on any stock exchange. The CME also offers a greater range of assets to be traded than any other commodity exchange.
Legally, the CME is part of CME Group – a conglomerate that also includes the NYMEX, the CBOT (Chicago Board of Trade), and a number of smaller exchanges. Although the NYMEX is behind the CME by trading volume and the range of goods being traded, it is the world leader in trading such an important strategic resource as petroleum. As a result, CME Group is a truly massive organization that boasts the highest trading volume in a great number of assets, from index and currency derivatives to agricultural commodities and fuel. CME Group holds the same place on the commodity market as NYSE Euronext does on the stock market. Today, however, we are only going to write about one member of this conglomerate – the CME itself.
The CME building is true to the typical style of Chicago business districts. Sharp vertical lines, strict adherence to monetary capitalism, no tiered architecture like in New York City, no nods to the old days. In the background to the right we can see Willis Tower, the USA's tallest skyscraper, and the world's tallest building from 1973 to 1998.
The CME was founded in 1874 to trade agricultural commodities, and was originally called the Chicago Butter and Egg Board. Due to the nature of these goods (such as the fact that they cannot always be delivered quickly), from day one the majority of deals consisted not of instant purchases, or spots, but their futures. In the 1960s, the range of contracts traded on the exchange widened: it became the first exchange in the world to trade futures on frozen pork and live cattle. But the true revolution happened in the 1970s and the 1980s, when the CME started trading futures and options on national currencies (such as the dollar and the yen) and stock indices (such as S&P 500).
As a result, the exchange stopped being purely a commodity exchange in the traditional sense, having also crept into currency and stock markets (through derivatives). In addition to traditional commodity traders, the exchange became popular with speculators who made money on price fluctuations for a wide range of assets from grain to currencies. However, the CME still primarily focuses on agricultural commodities.
What can interest a trader on a commodity exchange?
Unlike stock exchanges where the boundary between “investors” and “speculators” is a thin one (as they are all about various “papers” changing hands), commodity exchanges are supposed to be more “real” and less about “speculation”. Their primary purpose is to provide for the everyday needs of industries and whole countries, supplying them with raw materials, fuel, and food. A stock share can be resold immediately, or it can be resold years after it had been bought. It is much harder to resell a barrel of oil or a carload of grain. Once a consumer receives these goods, they typically use them for their intended purposes. This is why the majority of online traders does not literally buy goods, unless they do so on behalf of an industry. However, they may be interested in the derivatives of these goods – their futures and options. These derivatives can be resold just as freely as any other securities. Besides, such derivatives also exist for other goods than oil and grain.
Trading Floor of the Chicago Mercantile Exchange.
Trading in futures and options runs higher risks compared to stock trading, but the rewards can be very quick too. Trading such assets typically requires greater competence and greater ability to estimate risks on the part of the trader. Trading futures and options is not recommended for those who treat the market as a casino and hope to get lucky. Such traders immediately find themselves at a disadvantage before professionals who use mathematical methods to estimate the investments' profitability.
It also goes without saying that one needs to remember the original purpose of the goods being traded, otherwise embarrassing situations can happen. If you do not want to have a cistern of grain sitting in your backyard, you must resell the futures contract for the grain before delivery, or make sure that it is a cash-settled contract. You can read more on futures and options, and these assets' other features, on Wikipedia (futures, options).
The CME's Most Popular Assets
The most popular currency future on the CME (and in the world overall) is the one for the euro/US dollar pair (EUR/USD). In a day, about 186,000 such contracts are made for a total amount of $25B. In addition to that, 33,000 options are made in a day for the same pair. The total monthly turnover for these instruments is over $700 – a significant part of the exchange's total turnover. This pair is closely followed by the yen/dollar pair (JPY/USD): 132,000 futures and 16,000 options a day, over $500B a month.
The first place by number of contracts (but not by revenue) on the CME is held by futures and options for the S&P 500 index. Each day, over 2M futures and options are made for it, with a monthly revenue of around $3B.
Among agricultural commodities, maize is the most popular product. In a day, about 600,000 contracts are made for it for about 3B bushels (100M cubic meters). In a month, that would be 3 cubic kilometers (!) for a sum of around $5B. In a year, that would become 40 cubic kilometers. It should be noted, though, that most of this trading volume is virtual, as it consists of contract resales between traders. To actually deliver all of these cubic kilometers to consumers, one would need several times the world's resources to produce that much grain.
Wheat, which is considered to be Russia's number one crop, is far behind maize on the CME, as only a third of maize's amount is being traded (in cash as well as physical volume) - “only” 1 cubic kilometer per month, or over 10 cubic kilometers per year. Once again, these figures are virtual, as the total volume of actual wheat harvested worldwide is less than 1 km3 (around 1B tons). However, even if we line up the grains that actually reach their consumers, the length of the line would still be an astronomical one – over twenty billion kilometers, more than the diameter of Pluto's orbit.
The CME and Online Brokers
Most major online brokers give their clients access to the CME. Still, working with derivatives is more complicated technically than working with stock shares. Many well-known terminals do not support trading in options, and brokers suggest using the QUIK terminal to trade this type of assets. Most of them have a separate module called Option Board, Option Trader, etc., but such modules are not always easy to use. A good example of an easy-to-use option trading interface is the option board in the EXANTE terminal.
Another difficulty arises because many brokers require clients to open different accounts for trading derivatives and stock shares. This is typical of American brokers, such as Interactive Brokers. On the other hand, European brokers such as EXANTE usually allow one to trade all types of assets from the same account.
Commissions may differ drastically with different brokers when working with the CME and other commodity exchanges – from a few cents to several dollars per contract. With EXANTE, the maximum commission is $1.5 per future or option on the CME (though it can get lower given high turnovers).