Tuesday, November 6, 2007

A futures exchange

A futures exchange is a central financial exchange where people can trade standardized futures

contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a

specified price with delivery set at a specified time in the future.


History of futures exchanges

Though the origins of futures trading can supposedly be traced to Ancient Greek or Phoenician times, the

history of modern futures trading begins in Chicago, United States in the early 1800s. Chicago is

located at the base of the Great Lakes, close to the farmlands and cattle country of the U.S. Midwest,

making it a natural center for transportation, distribution and trading of agricultural produce. Gluts

and shortages of these products caused chaotic fluctuations in price. This led to the development of a

market enabling grain merchants, processors, and agriculture companies to trade in "to arrive" or "cash

forward" contracts to insulate them from the risk of adverse price change and enable them to hedge.

Forward contracts were standard at the time. However, most forward contracts weren't honored by both the

buyer and the seller. For instance, if the buyer of a corn forward contract made an agreement to buy

corn, and at the time of delivery the price of corn differed dramatically from the original contract

price, either the buyer or the seller would back out. Additionally, the forward contracts market was

very illiquid and an exchange was needed that would bring together a market to find potential buyers and

sellers of a commodity instead of making people bear the burden of finding a buyer or seller.

In 1848, the Chicago Board of Trade (CBOT)--the world's first modern futures exchange--was formed.

Trading was originally in forward contracts; the first contract (on corn) was written on March 13, 1851.

In 1865, standardized futures contracts were introduced.

The Chicago Produce Exchange was established in 1874 and renamed the Chicago Mercantile Exchange (CME)

in 1898. In 1972 the International Monetary Market (IMM), a division of the CME, was formed to offer

futures contracts in foreign currencies: British pound, Canadian dollar, German mark, Japanese yen,

Mexican peso, and Swiss franc.

In 1881, a regional market was founded in Minneapolis, Minnesota and in 1883 introduced futures for the

first time. Trading continuously since then, today the Minneapolis Grain Exchange (MGEX) is the only

exchange for hard red spring wheat futures and options.[1]

Later in the 1970s saw the development of the financial futures contracts, which allowed trading in the

future value of interest rates. These (in particular the 90-day Eurodollar contract introduced in 1981)

had an enormous impact on the development of the interest rate swap market.

Today, the futures markets have far outgrown their agricultural origins. With the addition of the New

York Mercantile Exchange (NYMEX) the trading and hedging of financial products using futures dwarfs the

traditional commodity markets, and plays a major role in the global financial system, trading over 1.5

trillion U.S. dollars per day in 2005.

The recent history of these exchanges (Aug 2006) finds the Chicago Exchange trading more than 70% of its

Futures contracts on its "Globex" trading platform and this trend is rising daily. It counts for over

45.5 Billion dollars of nominal trade (over 1 million contracts) every single day in "electronic

trading" as opposed to open outcry trading of Futures, Options and Derivatives. And that is only one of

the worlds current Futures Exchanges, albeit the largest one at this writing.

In June of 2001, ICE acquired the International Petroleum Exchange (IPE), now ICE Futures, which

operated Europe’s leading open-outcry energy futures exchange. Since 2003, ICE has partnered with the

Chicago Climate Exchange (CCX) to host its electronic marketplace. In April of 2005, the entire ICE

portfolio of energy futures became fully electronic.

In 2006, the New York Stock Exchange teamed up with the London Exchanges "Euronext" electronic exchange

to form the first trans-continental Futures and Options Exchange. These two developments as well as the

sharp growth of internet Futures trading platforms developed by a number of trading companies clearly

points to a race to total internet trading of Futures and Options in the coming years.

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