US futures exchanges have evolved from being a pit-based system to a more sophisticated trading platform. In the early days, they were a just marketplace where agricultural products changed hands. Today, their selections have become more sophisticated, catering to various stakeholders’ needs. While the exchange market has consolidated into a few big players, there is no shortage of competition between them. These exchanges constantly evolve and seek ways to increase their market share by offering better terms, newer products, or better platforms. The exchanges have also played an immense role in developing the capital markets in the US.
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 participate in the forward market where it’s possible to fine-tune contracts to meet the trader’s requirements. A forward market does not have the same liquidity, and there is no intermediary to settle such 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 a futures exchange brings because the default risk in a forward contract is significantly higher. These exchanges’ clearing services ensure that even small traders can settle their trade without spending much time finding a counterparty.
The settlement process in a futures exchange is comparatively simple as well. A trader can extend the contract on the expiry date by purchasing a new futures contract with an extended expiry date. Alternatively, there could be an offsetting position to take on the same contract (i.e., go short the futures if currently a long position is held). In some instances, there is a physical delivery of the underlying in exchange for the quoted price. The flexibility offered by a futures exchange is not something you can get with a forward derivative.
Over the years, the futures exchanges have seen smaller players’ participation increase due to their ease of access and use. The trading platforms have developed significantly and allow market participants to make more informed decisions.
Overview of US Futures Exchanges
In its early days, the futures exchanges in the US offered contracts on agricultural goods. The Chicago Board of Trade (CBOT) was the first exchange in the US that offered futures contracts on corn, wheat, soybeans, and the like. This limited selection remained for a long time. There were no significant developments in the futures market as far as the diversity in products was concerned. They introduced other agricultural commodities like cotton, cocoa, and sugar as their consumption increased in the US.
In the 1970s, the futures market in the US saw significant development. The introduction of the Commodity Futures Trading Commission was an absolute game-changer. On November 26, The CFTC allowed trading futures contracts on the 90 US Treasury bill in the Chicago Mercantile Exchange. By 1977, trade on futures contracts for long-term debt had also started in 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. It offers futures on a wide range of products like Bitcoins offered by the Chicago Mercantile Exchange and Chicago Board Options Exchange. In the early days, contracts were settled on the exchange floor, but today, electronic platforms have made it convenient for traders. The exchanges have also consolidated, with a few major ones controlling most of the volume. A few of these exchanges will be discussed in the next section. With market manipulation being a major concern, these exchanges are tightly regulated, and specific guidelines need to be followed while trading.
The Chicago Mercantile Exchange Group, commonly known as the CME Group, is one of the leading derivatives marketplaces offering many products. It comprises four exchanges, namely the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), Chicago Board of Trade (CBOT), and Commodity Exchange (COMEX). Each of these exchanges within the CME group offers futures on the specific asset class, and the wide range of the products provided has led to the CME group being one of the largest exchanges when it comes to futures trading.
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 minor stake in the overall trade. With the due passage of time, the contribution of settlements through open outcry is expected to diminish further as electronic trades become the preferred mode.
While the CME group dominates the US markets, it does have a global outreach with a significant presence in Europe, Asia Pacific, and Latin America.
Chicago Mercantile Exchange
The Chicago Mercantile Exchange, or CME, was formed as an agricultural commodities exchange and is among the oldest US futures exchanges. It merged with the NYMEX and 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 categories of asset classes, namely Interest Rate, Agriculture, F.X., and Equities. Some of the futures contract within each type have been tabulated below:
Block Cheese Futures, Bursa Malaysia Crude Palm Oil – Gasoil Spread Futures, Class III Milk Futures
Australian Dollar Futures, Australian Dollar/Japanese Yen Futures, Brazilian Real Futures
Adjusted Interest Rate S&P 500 Total Return Futures, BTIC E-mini FTSE China 50 Index Futures, BTIC E-mini Nasdaq-100 Futures
Looking at the table above, one can understand how the CME group has emerged as a dominant player in the futures market. CME has created a market for non-domestic products and has also given traders a platform to take positions on currencies and interest rates not based in the US.
New York Mercantile Exchange
New York Mercantile Exchange or NYMEX became a part of the CME group in 2008 and is primarily focused on energy products. While the asset class may be limited to only Energy (and a few Agricultural Commodities), their selection within the energy futures space is pretty exhaustive.
Brent (Singapore Marker) Futures, Australian Coking Coal (Platts) Low Vol Futures, Daily WTI Financial Futures, E-mini Natural Gas Futures, Gulf Coast Heating Oil (Argus) vs. N.Y. Harbor ULSD Futures
Cocoa Futures, Coffee Futures
The exchange covers almost every asset in the energy space and offers traders the flexibility to choose from a wide range of available assets. Some futures cover energy essentials that originate outside the US, and the NYMEX provides a marketplace for trading such products. NYMEX has specialized itself into an exchange focussed on energy, and therefore, the futures on agricultural goods are limited. Futures on financial products like interest rates or currencies are non-existent.
Chicago Board of Trade
The Chicago Board of Trade (CBOT) merger into the CME group has widened the parent exchange scope as far as derivatives trading is concerned. It was one of the oldest exchanges to be established. Back in the late 1980s, CBOT offered futures on wheat, corn, and soybean. It served as a marketplace where farmers could hedge their produce and was a key platform where the buyer and seller could interact. Since its inception, CBOT has expanded the futures market in the US and currently offers futures on a wide range of products. Unlike the NYMEX, it is not focused on a particular segment. Some of the contracts offered have been mentioned below.
2-Year T-Note Futures, US Treasury Bond Futures
Ethanol Futures, Ethanol Forward Month Futures
Australian Wheat FOB (Platts) Futures, Black Sea Corn Financially Settled (Platts) Futures, FOB Santos Soybeans Financially Settled (Platts) Futures, Mini Soybean Futures, Soybean Oil Futures
Dow Jones Industrial Average Total Return Index Futures, Micro E-mini Dow Jones Industrial Average Index Futures
CBOT mainly deals in futures on Agricultural products and a small selection of Interest Rate and equity futures. It does not have futures on foreign currency, and the portfolio catering to Energy is also not as exhaustive as the NYMEX.
CBOT was primarily an open outcry exchange, but currently, the number of pits offering such an option has reduced considerably. Most of the trading takes place through the online channel.
The Intercontinental Exchange (ICE) was formed in 2000 with a vision to create a transparent and efficient OTC trading platform for energy products. It first forayed into the futures trading business by acquiring International Petroleum Exchange (IPE) in 2001. ICE has always pursued a growth path by acquiring other exchanges, which has increased the portfolio of its selection in the futures market. Some of the major acquisitions include:
International Petroleum Exchange
New York Board of Trade
Winnipeg Commodity Exchange
Futures related to emissions products like carbon dioxide
Enabled to operate multiple exchanges offering futures on a wide array of products
The futures market for ICE has grown through these acquisitions even though ICE continues to offer OTC derivatives. The ICE Futures Europe is one of the largest markets for energy futures, and the company is continuously looking to expand into new territories. The outreach of ICE is also quite vast as it has a significant presence in Europe. The exchange has leverage on technology to scale up its business and is constantly looking for opportunities to acquire firms that offer advanced platforms for dealing in financial products. ICE also provides clearing facilities in Singapore through its ICE Clear Singapore arm. The exchange has also been looking to make inroads into the digital assets market by tapping the opportunities offered by cryptocurrencies like Bitcoin.
Other US Futures Exchanges
There was a time when only big players participated in futures trading. As time passed, their selection increased, and many developments encouraged smaller traders to participate in the market. For example, mini contracts were introduced so that the exposure was not too high for smaller players. People no longer had to contest in the pits for placing a bid. Even though there has been a consolidation in the futures exchange, the US still has a few exchanges that offer particular products. A few of them have been mentioned in the next section.
The Small Exchange
As the name suggests, the Small Exchange focuses on smaller contracts that enable smaller players to enter the futures market. The futures they offer generally tend to be the same in terms of the products and expiry dates as the other exchanges. It is only the underlying value that is smaller and encourages traders with lesser capital to participate. Some of the products offered have been tabulated below:
Futures available on an index that represents the technology sector
Small Stocks 75
Futures available on an index that represents 5 equally weighted sectors comprising of 15 stocks each
Small Precious Metal
Futures available on an index comprising of gold, silver and platinum
Small US Dollar
Futures on a currency index of GDP-weighted combination of 7 currencies
Small 2 Year Treasury Yield
Futures based on a 2-year Treasury note
Small 10 Year Treasury Yield
Futures based on a 10-year Treasury note
Small 30 Year Treasury Yield
Futures based on a 30-year Treasury bond
The investors generally have to put up an upfront margin that is generally below $100,000. Such small contracts are generally not available in the leading exchanges that were discussed earlier.
Minneapolis Grain Exchange
Minneapolis Grain Exchange is another commodity-based futures index formed in the late 1800s and has offered futures contracts on wheat, corn, and soybeans for over 125 years. The exchange has completely stopped trading futures through the outcry option, and all of the transactions take place through the electronic trading platform.
There have been numerous futures exchanges in the US market offering various products. Exchanges like OneChicago offering futures contracts on single stocks have existed for a couple of days before closing down. Major players continue to dominate the market. Therefore it is unlikely for smaller players to challenge these dominant exchanges. One of the reasons is these large exchanges’ ability to reduce traders’ costs since trades’ volume is higher in these exchanges. The infrastructure and other maintenance costs per trade would generally be higher for the smaller exchanges having a lesser trade volume. Owing to the vast array of futures that these large exchanges offer, the scope for differentiation among small exchanges is negligible, making them less preferable for traders. However, newcomers like the Small Exchange have penetrated a segment that has often been neglected by the established names indicating that there is still scope for innovation.
Final Thoughts on US Futures Exchanges
To sum it up, The futures market in the US has come a long way. Today it caters to many different investors’ needs. Once used as a tool for hedging, futures have also been tapped by speculators to amass gains. The development of the exchanges has enabled traders to take a more active role in a highly liquid market. The ease of access has also improved with transparency in pricing data provided by these marketplaces. It is also fascinating to observe how exchanges can roll out new products that cater to a wide class of assets. These exchanges have also enabled traders to take positions in commodities originating from a different country.
Institutional investors continue to play a major role in the markets for these instruments. However, the introduction of mini contracts has been welcomed by smaller investors. US futures exchanges have also been instrumental in integrating markets, and one could expect better price discovery as the participation across these platforms become more global.