Understanding Dow Futures – Part 6

The organization of futures exchanges standardized the freely traded forward contracts. They set the quality, quantity, and delivery points of every contract. This made it easier for the hedgers to determine the value of their products and agreements.

Over the past 100 years, U.S. futures exchanges have merged and morphed. While there are regional futures exchanges and specialty futures exchanges, there are three dominant players in the United States.


Chicago Board of Trade

The Chicago Board of Trade (CBOT) was established in 1848. It is one the world’s oldest derivatives exchange. Forty-seven futures and options products trade on the CBOT. In 2001, trading volume exceeded 260 million contracts.

At the outset, the CBOT focused solely on agricultural futures and wheat, corn and oats dominated the landscape. Almost 130 years after the CBOT was formed, the lineup of products was finally expanded. Legislation allowed the CBOT to offer futures on financial instruments for the first time. Futures on U.S. Treasury bonds became the pioneering financial instrument. Today, U.S. Treasury bonds are one of the most actively traded futures around the world.

In 1982, options on futures contracts were finally allowed. Overnight, this changed the way futures were traded.

The CBOT stays on the cutting edge of the industry. It has introduced futures and futures options on the Dow Jones Industrial Average, and upgraded and added an electronic trading system to its infrastructure. This was a huge feat since trading had been done primarily with open outcry, where live traders buy and sell in the pits, for 150 years.

Chicago Mercantile Exchange

The Chicago Mercantile Exchange (CME) began in 1898 as the Chicago Butter and Egg Board. Like the CBOT, it offered only agricultural products. The CME finally ventured from basic agricultural products with the introduction of frozen pork belly futures in 1961. This was the first futures contract based on frozen meat. Continuing its pioneering efforts, the CME introduced live cattle futures in 1964. This was the first time futures were offered on a nonstorable commodity.

The CME launched currency futures in 1972. They were the world’s first financial futures contracts. Prior to this, the CME traded only commodities such as corn, wheat, and pork bellies. This new development was in direct response to the breakdown of the Bretton Woods Agreement.

On May 16, 1972, seven forex currency futures contracts were listed. The contracts dealt in British pounds, Canadian dollars, German deutsche marks, French francs, Japanese yen, Mexican pesos, and Swiss francs.

The CME has an electronic trading platform that offers trading 24 hours a day, 5 days a week.

In April 2001, the CME expanded forex market coverage by offering electronic access to its full range of currency contracts virtually 24 hours a day via the Globex electronic trading platform. This electronic trading access occurs side by side with floor trading in CME’s currency pits during floor trading hours.

In March 2003, the total notional value of forex trading at CME was US$347.5 billion. Currency futures are derivatives on the interbank cash and forward exchange rates.

In 2002, the CME became the first U.S. financial exchange to become publicly traded.

In 2007, the CME and the CBOT merged to form the largest derivatives exchange in the United States.

New York Board of Trade

The New York Board of Trade (NYBOT) didn’t exist until 1998. It was born through the merger of the Coffee, Sugar, & Cocoa Exchange, Inc. and the New York Cotton Exchange.

The New York Cotton Exchange was founded in 1870 and the Coffee Sugar & Cocoa Exchange, Inc. was founded in 1882. These two pioneered sugar options, frozen concentrated orange juice, and the New York Stock Exchange Composite Index, as well as the Commodity Research Bureau Futures Price Index.

The NYBOT has opened the first full-time electronic market for U.S Treasury and agency futures. The NYBOT is a not-for-profit membership organization. It was established as the parent company for the two merged exchanges and their subsidiaries and divisions.

New York Mercantile Exchange

The New York Mercantile Exchange (NYMEX) began as the Butter and Cheese Exchange of New York. It was founded in 1872 by dairy merchants who wanted to bring order and standardization to their industry. By 1882, the product line had expanded and the group changed its name to the New York Mercantile Exchange.

Today, the NYMEX no longer deals with agricultural products. In 1978, the introduction of heating oil futures set the stage for NYMEX’s dominance in the energy sector. It is also dominant in metal futures.

The exchange has two divisions, the NYMEX Division and the COMEX (commodity exchange) Division. The first focuses on energy, platinum, and palladium futures and options. The second handles gold, silver, copper, and aluminum.

What Markets Are Traded?

Futures contracts in the United States and in various other countries fall into six broad categories: agricultural, metallurgical, interest-bearing assets, indices, foreign currency, and security futures.


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