Greeting traders and welcome back to another In Depth with Chris Episode.
In today's discussion, we'll be covering US futures exchanges.
Perhaps you were wondering a little bit more about the
US exchanges that exist, or you're in another country and
you're curious how our exchanges may be different, or perhaps
more similar to your own than you might even realize.
This is the type of information that may not intentionally
help you pass the Gauntlet Mini, but
nonetheless helps you stay well-rounded as a trader,
and that is important. Keeps that brain growing. Without further
ado, though, let's dive into that material and learn a thing
or two about those US-based exchanges.
US futures exchanges have evolved from just being a loud,
noisy, pit-based system to a more sophisticated trading platform.
In the early days, they were just a marketplace where agricultural
products changed hands.
Today, their selections have become far more sophisticated,
catering to various stakeholders' needs and wants.
While the exchange marketplace itself has consolidated into
only a few big players, for the most part, there is really
no shortage in competition between them.
We're going to dive into all the different exchange options
that we have here inside the US, or at least the most popular
options that currently exist at the time of this video.
By definition, a futures exchange is a platform where traders
can buy or sell futures contracts.
These futures contracts can use several underlying assets,
ranging from commodities to equity indices.
By standardizing the futures contract, these exchanges promote
ease of access and enhance a marketplace's liquidity.
For more customized contracts,
participants could choose to participate in the forward market,
where it is possible to fine-tune the contracts to meet the trader's requirements.
A forward market, however, does not have the same liquidity,
as there is no intermediary to settle those contracts.
Futures exchanges have better pricing information, and the
daily settlement of trades and margin requirements ensures
that the possibility of default on the expiry date is minimal.
This added transparency is another advantage that futures
exchanges bring to the table because the default risk in
a forward contract is just substantially higher.
The settlement process in a futures exchange is comparatively
simple. A trader can extend the contract on the expiry date
itself by purchasing a new futures contract with an extended expiry date.
Alternatively, there could be an offsetting position to take the same contract.
An example of this would be to go short if the futures contract
is currently being held long.
In some instances, there is a physical delivery of the underlying
exchange of the quoted price in all of the agreements.
But this is very rare.
Futures exchanges themselves are more often than not, today,
a place for traders to speculate on the price instead of taking delivery.
In the early days, US futures exchanges offered contracts on agricultural goods
like we mentioned. The Chicago Board of Trade, otherwise
known as the CBOT, was the first exchange in the US that
offered futures contracts on products like corn, wheat, and
soybeans. This limited selection remained for a relatively long time.
There were no significant developments in the futures market
as far as the diversity in products, and this really stayed
this way for quite some time until the 1970s.
In the 1970s, the futures market in the US saw a significant
development with the introduction of the CFTC, otherwise
known as the Commodity Futures Trading Commission, by real
definition, but most of us just know it by CFTC.
This was something that allowed for further regulation on
what was going on in the market and allowed for the trading
of futures contracts on all 90 US treasury bills in the Chicago
Mercantile Exchange itself. By 1977, trade on futures
contracts for long-term debt had also started in the CBOT.
There were contracts on foreign currencies as well, and the
scope of future trading was no longer limited to agricultural
products. The US futures market has the highest trading volume
globally and is one of the most advanced markets in the world.
It offers futures on a wide range of products like bitcoins
offered by the Chicago Mercantile Exchange and the Chicago
Board Options Exchange, as well as various other choices
that are just not offered anywhere else.
In the early days, contracts were settled on the Exchange
floor, but today electronic platforms such as our computers
and the internet have made it far more convenient for us
to be able to trade without actually being there and bumping
into people and potentially catching COVID.
The Chicago Mercantile Exchange Group, commonly known as
the CME Group, is one of the leading derivatives marketplaces
offering so many products. It comprises of four exchanges, namely
the Chicago Mercantile Exchange, which we know as the CME.
Then there's the New York Mercantile Exchange, otherwise known as NYMEX.
Then there's Chicago Board of Trade, otherwise known as CBOT.
Then finally, we have the Commodities Exchange, which is COMEX.
Each of these exchanges within the CME Group offers futures
on specific asset classes, as well as a wide range of products in general.
This has led to the CME Group being one of the largest
exchanges when it comes to futures trading around the world.
The exchanges within the CME Group have also been instrumental
in developing electronic trading platforms, which has led
to greater penetration of the derivatives market.
Trading on the electronic platforms continues to dominate
the pie, with open outcry controlling a very, very minor
stake in today's overall trading volume.
The CME was formed as an agricultural commodities exchange
and is one of the oldest exchanges in the US.
It merged with the NYMEX and the COMEX in 2008,
and since then, the volume of trades has surged
remarkably. Most of the trades take place through its online
platform called CME Globex Trading System.
The exchange offers futures on broadly four asset categories,
namely interest rates, agriculture, forex, and equities.
Some of the futures contracts offered here could include things
like Australian dollar futures or adjusted interest rate
S&P 500 total return futures, or perhaps the one month
Eurodollar futures, or potentially block cheese futures
if you're interested in trading that. The New York Mercantile
Exchange became part of the CME Group in 2008, and it's primarily
focused on energy products.
While the asset classes may be limited to only energy and
a few agricultural commodities, their selection within the
energy future space is pretty exhaustive to look at.
There's a ton of things here, and I strongly recommend, if
you're interested in trading energy futures that you definitely
take a look at the New York Mercantile Exchange.
It covers almost every asset in the energy space and offers
a very wide range of flexibility when choosing from
these assets. There's tons of options.
Once again, it's entirely up to what you decide to trade,
But if you're looking for energy futures, this might be the place to go.
The Chicago Board of Trade merger into the CME Group has
widened the parent exchange scope
as far as derives trading is definitely concerned.
It was one of the oldest exchanges to be established, which
was back in the 1980s.
The CBOT offers futures on wheat, corn, and soybean.
It serves as a marketplace where farmers can and still hedge
their produce if they need to.
That's how it really got going,
but since its inception, CBOT has expanded the futures market
in the US exponentially and offers futures on a very wide range of products.
Unlike the NYMEX, it's not focused on just a particular
segment, so you'll find a very wide range of things here,
including the energy sector, agriculture, equities, and even interest rates.
The Intercontinental Exchange, otherwise known as ICE, was
formed in 2000. This was done with a vision to create
a transparent and efficient OTC trading platform, otherwise
known as "over the counter," for energy products.
That was their goal.
It first entered the futures trading business by acquiring
International Petroleum Exchange, which was IPE back in 2001.
ICE has always pursued a growth path by acquiring some other
smaller exchanges, which has allowed them to continuously
grow over time, and their portfolio is continuously expanding as well.
This is another one, not nearly as popular as perhaps NYMEX
or the CBOT, but another one that is worth being aware of
to potentially check out if you're looking for more options to trade.
In summary, the US futures market has come a tremendously
long way in relatively a short period of time and continues
to advance its options as well as even the number of exchanges
that are offered here on daily basis.
There are other exchanges that you can find to trade at
around the world, but the idea is, at least be aware of the
big dogs, at least here in the US.
That way, you have something to compare to if you're trading
on an exchange outside the US, or if you're inside the US
and you want to trade on something close to home, and you
want to know what the biggest ones are. Well, now you do.
But until next time folks, thank you for joining me
as always. If you haven't, please do me a favor and click
that like and subscribe button down below so I can keep coming
out with content for you guys.
I wish you all the best of luck in your trading journeys,
and I'll see you on the other side.