Chicago Mercantile Exchange (CME)

by · June 14, 2012

The Chicago Mercantile Exchange (CME), a financial and commodity futures and options exchange located at 20 S. Wacker Drive, Chicago, was established in 1898 as an agricultural commodities exchange as Chicago Butter and Egg Board. Often referred to as ‘the Chicago Merc’ or simply ‘the Merc’, it was initially a non-profit organization. The CME changed to a joint stock company with its initial public offer in December 2002. In July 2007 it merged with the Chicago Board of Trade (CBOT) and became part of the CME Group Inc. The following year, on August 18, 2008, the CME Group took over the New York Mercantile Exchange (NYMEX) and COMEX. The CME Group Inc. now owns the CME, CBOT, NYMEX and COMEX.

Presently, the Chicago Mercantile Exchange offers several types of financial products for trade including interest rates, equities, commodities and currencies. Its portfolio of alternative financial investments includes weather and real estate derivatives. It has more outstanding options and futures contracts than any other derivatives exchange in the world.

The Chicago Mercantile Exchange is a Designated Self-Regulatory Organization and was empowered as a primary regulatory authority over firms like MF Global.

The CME took the lead in the development and marketing of CME SPAN software, which is currently the official performance bond mechanism of nearly 50 exchanges, service bureaus, clearing houses and regulatory agencies worldwide.

Trading Systems

Trading at CME is conducted in the traditional open outcry system as well as on CME’s electronic trading platform, the CME Globex. Currently, electronic trading comprises of almost 80% of the total traded volume.

  • Open Outcry or Pit Trading

The open outcry is the traditional method of trading where floor traders stand in a trading pit and call out orders, prices and quantities of a particular traded product. Traders, runners and CME employees use different colored jackets to indicate their function on the trading floor. Along with yelling orders, traders use a complex system of hand signals to convey price, quantity and whether they are buying or selling.

A trading pit is usually designed as a small amphitheatre with stairs leading up to a round platform and then a couple of stairs leading down to the pit. During trading hours, to a layman it appears as if there is all chaos and confusion in the pit but the reality is that it is a time tested system that is not only accurate but also efficient. The exchange has compiled a pictorial record of hand signals to be used in CME pits that is available to all those who participate in pit trading.

  • Electronic Trading Platforms

The CME Globex trading system is the actual center of whatever the Chicago Mercantile Exchange stands. The electronic trading system was first proposed in 1987 but became a reality only in 1992, when it became the first electronic trading platform for derivatives contracts. It is totally automated and allows traders to place orders from booths within the exchange premises as well as from the comfort of a home or office regardless of the location. The system recorded its one-billionth transaction on 19th October 2004.

When the CME Globex was first launched in 1992 it used the technology and network belonging to Reuters. Six years later, in September 1998, the second generation Globex was launched. The new system used a modified version of the NSC trading system developed by Paris Bourse for the Euronext (MATIF at that time).

Connection to Globex is via Market Data Protocol and iLink 2.0 for routing.

M & A Timeline

  • 2006: CME purchases Swapstream, a London-based electronic platform for interest rate swaps.
  • October 16, 2006: The Chicago Mercantile Exchange announces that it intends to purchase the Chicago Board of Trade (CBOT) for $8 billion in stock. CBOT, which earlier uses outsourced trading platforms, now moves over to CME’s Globex trading system. The shift is seen as a significant savings for and as an indication of the improved strength of the new group company, CME Group Inc. the umbrella under which both CME and CBOT are now to operate. Both the shareholders of CME and CBOT approved the merger agreement on July 9, 2007 after it had been modified four times. On final closure of the merger agreement, the shares of CBOT (old symbol: BOT) ceased to trade and as agreed upon, were converted to CME shares.
  • March 17, 2008: the New York Mercantile Exchange (NYMEX) is proposed to be merged with the CME Group Inc. after the NYMEX accepts in principle the CME offer of purchase for $8.9 billion in cash and CME shares. After completion of acquisition formalities, NYMEX becomes a part of the CME Group on August 2008. By September 30, 2009 the NYMEX systems totally integrate with CME systems.

Futures and Options Contracts in Commodities

CME offers derivatives trading in the agricultural commodities:

  • Feeder Cattle
  • Class IV Milk
  • Class III Milk
  • International Skimmed Milk Powder (ISM)
  • Nonfat Dry Milk
  • Deliverable Nonfat Dry Milk
  • Dry Whey
  • Cash-Settled Butter
  • Butter
  • Live Cattle
  • Lean Hogs
  • Frozen Pork Bellies
  • Random Length Lumber
  • Softwood Pulp
  • Hardwood Pulp

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