Transcript Commodity Exchanges and Trade Centers

Agribusiness Library
Lesson 060059
Commodity Exchanges and Trade Centers part 1
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Objectives
1. Explain the history of commodity exchanges.
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Terms
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cash transactions
clearinghouse
forward contracts
miniature contracts
time contracts
to-arrive contracts
trade centers
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What is the history of
commodity exchanges?
Futures trading began in the 17th century in
Japan with the use of rice futures. Maintaining
a year-round supply of seasonal products and
agriculture crops was difficult, so futures
trading became a well-known tool to solve
these problems. In Japan, rice was stored in
warehouses and would be available for future
use.
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What is the history of
commodity exchanges?
Warehouse holders would sell receipts against
the stored rice. The rice tickets became a kind
of general commercial currency. Rules were
developed and were eventually similar to the
current rules of American futures trading.
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What is the history of
commodity exchanges?
A. Trade centers are locations where resources
can be bought or traded. Historically, the first
cities were located because they were able to
provide people with necessary elements (e.g.,
water, land, and protection) for survival.
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What is the history of
commodity exchanges?
A. Trade Centers….necessary elements (cont’d)
1. Water is the first necessary element. If there is
water available in the form of a flowing source
or an underground source, people can access
it easily. This allows people to have a constant
source of water for transportation, cooking,
and various other uses. Water is necessary for
survival, so it is important to have a
dependable source.
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What is the history of
commodity exchanges?
A. Trade Centers….necessary elements (cont’d)
2. Accessible farmland was important in the early
development of cities. To survive, a city must
be able to feed its people. If farmers have
nearby farmland, they will be able to produce
food for cattle and people and distribute it
easily.
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What is the history of
commodity exchanges?
A. Trade Centers….necessary elements (cont’d)
3. Protection is another consideration. People need
protection from the elements of nature, so they
need to settle in an area that is naturally
protected or that has the resources to build
protective areas. Many cities were formed in
hillsides and heavily wooded areas for this
reason.
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What is the history of
commodity exchanges?
B. As more cities were formed, the location of
other trade centers became a consideration.
New cities or trade centers were built in areas
between established trade routes. As a result,
the existing trading was available.
1. Early markets were based on cash transactions.
Cash transactions are sales made when the
product is delivered and paid for immediately.
They were often referred to as “spot
transactions” because the buyer was able to
visually inspect the product before taking
immediate possession.
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What is the history of
commodity exchanges?
2. As trading centers became more established,
many changes started to occur. Time contracts
(agreements between buyers and sellers to trade
before the product could be delivered) were used.
a. The price was usually negotiated in advance of
delivery when using time contracts. Many of these
sales transactions created problems because when
the product was finally delivered, there were
disputes about quality, quantity, price, and credit.
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What is the history of
commodity exchanges?
2. As trading centers became more established (cont’d)
b. To solve these problems, rules were established
and became codified bylaws in Europe in the 1300s.
Current exchange settings continue to conduct
business with strict codes to create fairness between
buyers and sellers.
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What is the history of
commodity exchanges?
3. As more trading took place, more problems arose.
a. Many of the trading centers did not have adequate
storage and transportation for growing deliveries.
b. During different seasons, certain products developed
shortages because of growing seasons, resulting in
increased prices. Without adequate storage space, it
was hard to avoid. This situation encouraged the
increased use of futures contracts. The two common
types were to-arrive and forward.
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What is the history of
commodity exchanges?
The two common types were to-arrive and forward.
 To-arrive contracts state that delivery will be in a
few days with the title passing from the seller to the
buyer.
 Forward contracts state that delivery will be in a
few days, but the title is not passed until delivery
occurs.
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What is the history of
commodity exchanges?
4. Storage of products became a big business. Many
people built large storage facilities to store products
and distribute them over a period of time.
Because roads were being built, transportation was
less of a problem, and distribution over a longer
period of time helped to lower the price difference
throughout the year.
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What is the history of
commodity exchanges?
C. In 1848, the Chicago Board of Trade (CBT) was
founded by 82 businessmen. They established
rules to make traders accountable to the terms
of the contracts being traded. The newly
founded CBT also allowed a consistent place for
people to trade. The New York Coffee,
Cotton, and Produce Exchanges were
started in the 1870s and 1880s.
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What is the history of
commodity exchanges?
1. In 1871, the CBT was destroyed in the Great
Chicago Fire. It is believed that modern day
contracts were traded as early as 1859, but the
records were destroyed in the fire.
2. The CBT started a concept that is still used today.
To buy a contract, a portion of the value was paid
to insure that buyers would not back out of their
contracts. With this new concept in place,
defaulting on contracts meant losing the deposit
money and the possibility of being sued in court.
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What is the history of
commodity exchanges?
3. In 1926, the CBT established a clearinghouse for
futures trades. The clearinghouse is a third party
between traders that insures performance from all
involved parties. Since the clearinghouse was
established, no contracts have caused any trader to
lose money because of the default of another
contracting party.
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What is the history of
commodity exchanges?
4. Early on, the CBT dealt with the trading of grains
(e.g., oats, wheat, and corn). After World War II,
many other contracts were added. Iced broilers,
gold, and silver were traded along with the grains.
In 1975, the first mortgage interest rate contracts
were traded.
5. Currently, the CBT has contracts for gold, silver,
U.S. Treasury bonds, U.S. Treasury notes, wheat,
corn, oats, rough rice, and others. Anyone who can
put a deposit down for part of the contract price is
able to buy and sell at the CBT.
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What is the history of
commodity exchanges?
D. The Chicago Mercantile Exchange (CME) began
as the Chicago Butter and Egg Board in 1898.
In 1919, the name was changed to the Chicago
Mercantile Exchange.
1. The first butter and egg contracts were traded
there in 1919. Live cattle and hogs were added
in 1964 and 1966, respectively. Many other
contracts have been traded, including onions,
potatoes, and scrap iron.
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What is the history of
commodity exchanges?
2. In 1972, the CME formed the International
Monetary Market to trade foreign currencies
a. As the exchange rates fluctuate in an uncertain
world economy, international investors use the
trading of foreign currencies for protection and
profit.
b. Some currencies the CME trades are the
Japanese yen, Brazilian
real, French franc, and the
Mexican peso.
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What is the history of
commodity exchanges?
E. Midamerica Commodity Exchange (MCE): After
the Civil War ended in 1868, the MCE was
started. It specialized in miniature contracts
— contracts like other exchanges trade only
smaller. For instance, instead of trading a corn
contract for 5,000 bushels at another
exchange, someone could trade for 1,000
bushels. The MCE merged with the CBT in
1986.
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What is the history of
commodity exchanges?
F. Minneapolis Grain Exchange (MPLS): The MPLS
was organized in 1881 to trade spring wheat
futures and options. It is also a large cash
wheat market. It currently trades barley, white
wheat, spring wheat, white shrimp, and black
tiger shrimp.
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What is the history of
commodity exchanges?
G. Kansas City Board of Trade (KCBT): The KCBT
was formed in 1856. It started the first stock
index futures and also trades western natural
gas.
H. New York Mercantile Exchange (NYME): The
NYME was founded in 1872. It has been the
major force in developing energy-based futures
and options. It trades platinum,
silver, crude oil, unleaded gasoline,
propane, electricity, and others.
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What is the history of
commodity exchanges?
I. New York Cotton, Citrus, Finex, and NYFE
Exchange (NYCE): The NYCE was formed in
1870. The citrus trading was added in 1966 to
trade frozen orange juice concentrate. In 1985,
financial futures and options were added.
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What is the history of
commodity exchanges?
J. The New York Coffee, Sugar, and Cocoa
Exchange (CSCE): The CSCE was started in 1882.
Sugar was added in 1914, and it merged with the
New York Cocoa Exchange in 1979. Current
trading includes sugar, coffee, cocoa, milk,
cheese, butter, and others.
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Review
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What were the main resources at the first
trade centers?
What is a time contract and why was it
needed?
What is a clearinghouse? Who established
the first clearinghouse for futures trades?
What was the major force in developing
energy-based futures and options?
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Agribusiness Library
Lesson 060059
Commodity Exchanges and Trade Centers part 2
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Objectives
2. Identify and describe the major commodity
exchanges in the United States and around
the world.
3. Distinguish between speculators and
hedgers, and define related terms.
4. Describe and demonstrate hand signals used
on commodity trading floors.
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Terms
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day traders
electronic traders
floor brokers
floor traders
hedgers
open outcry
positions traders
scalpers
speculators
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What are some of the major
commodity exchanges?
The largest exchange in the world was formed in
2007 when The Chicago Mercantile Exchange
(CME) and The Chicago Board of Trade (CBOT)
merged. This formed the CME Group Inc., which
is now the world’s most diverse exchange. The
global offices are in Chicago, New York, Houston,
Washington D.C., London, Hong Kong, Singapore,
Sydney, and Tokyo.
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What are some of the major
commodity exchanges?
A. The CME trades futures on just about anything.
Products from all major asset classes are
available for futures trading: foreign currencies,
stock index products, interest rate and Treasury
products, commodities, energy, metals, and
weather and housing indexes. CME Globex is an
electronic trading platform that offers trading
continuously.
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What are some of the major
commodity exchanges?
B. The New York Mercantile Exchange (NYMEX)
became part of the CME Group Inc. during 2008
and was to be fully integrated in 2009. The
NYMEX was the world’s largest physical
commodity future exchange. The New York
Mercantile Exchange and Commodity Exchange
(COMEX) were separate and had merged.
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What are some of the major
commodity exchanges?
C. Trading takes place at several locations around
the world. The world of trading is rapidly
changing with new electronic movements.
However, there are a few minor exchanges
compared to the CME Group Inc.
1. The Winnipeg Commodity Exchange is in Canada.
In 1999, it was the 41st largest futures and
options exchange in the world.
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What are some of the major
commodity exchanges?
C. Trading takes place at several locations (cont’d)
2. Initiatives in Mexico to develop an exchange have
been introduced. However, no organized
commodity futures exchange has yet been
created.
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What are some of the major
commodity exchanges?
C. Trading takes place at several locations (cont’d)
3. The Tokyo Commodity Exchange Inc. (TOCOM) is
the largest exchange in Japan. This exchange
group has undergone major consolidation
throughout the past 10 years.
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What are some of the major
commodity exchanges?
C. Trading takes place at several locations (cont’d)
4. The London Commodity Exchange (LCE) merged
with London International Financial Futures
Exchange (LIFFE) in 1996. Currently, both are a
part of the NYSE Euronext Group.
a. The NYSE Euronext was created in 2007 with a
merger between the NYSE Group (parent of the
New York Stock Exchange) and Euronext.
b. The NYSE Euronext provides exchanges in five
countries. It offers trading, clearing/settlement
in cash equities, equity interest, commodities,
and currency/bonds.
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What are some of the major
commodity exchanges?
D. The Commodity Futures Trading Commission
(CFTC) was formed in 1974 to regulate all
trading. It insures that business is legal and
professionally carried out with all the exchanges.
1. The Commodity Futures Trading Commission is
regulated by the Department of Agriculture.
2. It regulates the futures exchanges, brokerage
firms, money managers, and commodity advisors.
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What is the difference between
speculators and hedgers?
What are some of the related terms?
The participants within futures and options
trading are important to understand. The
following is a brief description of the wide
variety of participants:
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What is the difference between
speculators and hedgers?
What are some of the related terms?
A. Hedgers can be agriculture producers or
processors, mining companies, banks, and
others who use futures or options as an
alternative for buying or selling the actual
commodity. Hedgers buy or sell contracts to
offset risk associated with the changing prices
within the cash market. These participants, a
hog producer, a grain farmer, or a food
processing company will manage price risk while
having the ultimate goal as long-term price
certainty.
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What is the difference between
speculators and hedgers?
What are some of the related terms?
B. Speculators can be investors, hedge-fund
managers, banks, and others who accept price
risk. They try to make money by buying and
selling futures and options. Speculators try to
predict what the markets will do (go up or
down), the movement of the market, and the
price direction. Speculators also provide the
market liquidity.
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What is the difference between
speculators and hedgers?
What are some of the related terms?
B. The speculator group has grown and changed
due to the introduction of electronic trading,
which allows for more of a diverse population of
traders instead of the traditional high net-worth
individuals. The different types of speculators
are the following:
1. Position traders are individuals who hold on to
a position for several days or weeks and tend to
have an opinion about the general price trends.
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What is the difference between
speculators and hedgers?
What are some of the related terms?
B. The different types of speculators (cont’d)
2. Day traders are individuals who close out
positions by the end of the trading day. This
allows for no overnight margin calls.
3. Scalpers are the traders who hold on to
positions for a short time. This time period can
be within a few minutes or even seconds, which
has become a trend due to the increase of
electronic traders.
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What is the difference between
speculators and hedgers?
What are some of the related terms?
C. Floor traders are speculators who are buying
and selling contracts on the floor.
D. Floor brokers are people who serve as agents
for customers.
E. Electronic traders are individuals who rely on
the information provided electronically to buy or
sell futures and options.
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What common hand signals are used
on the commodity trading floor?
A few common hand signals are used in trading
by floor traders. These signals allow traders to
communicate during open outcry (trading is
done publicly, so each trader has a fair chance
to buy and sell).
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What common hand signals are used
on the commodity trading floor?
A. To buy contracts, the hand should be in a
position with the palms shown inward and the
number of fingers shown indicating how many
contracts are desired for purchase. For example,
three fingers should be shown with the palm of
the hand in to buy three contracts.
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What common hand signals are used
on the commodity trading floor?
B. To sell contracts, the hand should be in a
position with the palms shown outward and the
number of fingers shown indicating how many
contracts are desired for purchase. For instance,
four fingers should be shown with the palm of
the hand out to sell four contracts.
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What common hand signals are used
on the commodity trading floor?
C. If the price needs to be shown, the floor trader
will exhibit his or her fingers in a sideways
motion.
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Review
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What is the largest exchange in the world?
When was it created?
When and why was the Commodity Futures
Trading Commission developed?
How has electronic trading changed the
speculator group?
Demonstrate the hand signals learned in this
lesson.
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