The Great Futures Trading Houses

Today’s futures trading houses, also known as Exchanges, are in many respects the modern versions of marketplaces where farmers would try and secure buyers for their crops before harvesting. Finding buyers for commodities to be delivered at some future date has become a critical part of our economic system, and specialized futures exchanges have been established to provide a safe, secure forum for traders.

The “products” traded at today’s large futures exchanges run the gamut from financial instruments like bonds and other equities to industrial commodities such as base metals, gold and oil; and finally to agricultural commodities like grain, coffee, cocoa and silk. Often a major futures exchange will specialize in certain commodities, for example the London Metal Exchange (LME) and Japan’s Kobe Rubber Exchange (KRE).

Although futures can be traded at major stock exchanges like the New York Stock Exchange, it is large dedicated commodities exchanges that have caught the public eye. Perhaps the most famous is the Chicago Mercantile Exchange, or CME, which was established in 1898 as the Chicago Butter and Egg Board. This early version of the mighty CME traces its roots back to the early 1800s when the Chicago area was beginning to emerge as a mercantile and transportation hub. Today, the CME still retains vestiges of those early days of commodities trading such as the famous “open outcry” trading system, although electronic methods of trading futures like the CME Globex® electronic trading platform now handle about 70% of all trades. The CME has, at any one time, the world’s largest number of outstanding options and futures contracts!

The London Metal Exchange, or LME, is one of the largest international (non-US) futures exchanges and is the world’s largest futures and options trading house handling base metals such as copper, lead, tin and zinc. The LME differs from other futures exchanges in that it offers contracts with extended settlement dates and also provides a mechanism for cash trading. Interestingly, the LME provides storage facilities in the event that trades result in actual physical deliveries. The London Metal Exchange has a very long history extended as far back as 1571 when the Royal Exchange was opened. The very first metal traded was copper and the most recent addition to the list of metals traded is aluminum alloy in 1992. The world’s foremost metal futures house, the LME’s total annual trade value is in the neighborhood of $3 trillion!

With an increasing amount of commodities trading taking place in the Far East to feed China’s rapidly growing economy, it’s likely that one or more of the emerging Chinese commodity trading houses like the Shanghai Metal Exchange or the Hong Kong Futures Exchange will assume their place among the world’s great futures trading houses - in the future!

 

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