Chicago Mercantile Exchange

The Chicago Mercantile Exchange is one of the world’s largest futures, options, and derivate markets in the world. While the company has its roots in the land of not-for-profit organizations, the company eventually moved toward a for-profit model, and has since merged with the New York Mercantile Exchange as well as the COMEX to create one of the world’s largest financial services company, the CME Group.

Through their operations, investors can buy, sell, and trade any number of different financial products. Below are a few of the most popularly traded financial services:

Originally, futures products were all that you would find with a company like the CME Group. The first Chicago Mercantile Exchange allowed everyone from large and small to buy commodities into the future. Eventually, even small farmers and corporate hedge funds were lining up to participate. Farmers could sell their August crops in April, allowing them to find funding for their farms before the next season. Buyers would be able to lock in prices for commodities before the long summer months, and traders would be able to profit on the short-term fluctuations in price that occurred in between.

Options contracts are slowly growing in popularity among CME Group’s customers. Option contracts now exist for most every security, especially indexes, as investors buy and sell the right to buy and sell the largest stock indexes on the planet. While this segment hasn’t been revolutionary, it does allow for creative hedging and income-producing investment strategies that turn the food we eat, and the materials we use into high-powered financial instruments.

Highly speculative investments known as derivatives have caught on with the CME Group. In derivative trading, no commodities or indexes are actually trading hands. Instead, investors buy and sell only with cash, and there is no actual delivery of any good or service. Without delivery, derivatives are known as “cash-only settlement” products, which essentially means that those who participate on the derivatives market are not trading hard goods. The derivatives market is to futures what the casino is to Wall Street, a place where multi-billion dollar bets can be placed without changing the dynamics of the market itself. While individual investors rarely trade derivatives, having a market for derivative products allowed the development of ETNs, or exchange-traded notes, which buy derivatives in a pool on behalf of their investors.

The VIX volatility index is a perfect example of the growth in derivatives trading. The VIX rises and falls based on changes in the option premiums on S&P 500 component stocks. Before the creation of the derivatives market, investors who wanted to buy the VIX would have to buy options on all S&P 500 stocks, hoping to profit when volatility increased. The purchase of 500 different options contracts, however, is challenging and costly. To circumvent this problem, the volatility index was created to allow investors to buy and sell intangible volatility without having to enter the options markets themselves. Today, thousands of traders from hedge funds to seasoned bankers buy the volatility index to protect their portfolios against volatility risk, and also to profit on predicting future upswings in volatility.

The Growth in Electronic Trading
The futures market was one of the first markets to ever go electronic. In 1987, the Chicago Mercantile Exchange decided that it was time to bring an electronic market to the scene. From that day on, the CME would trade exclusively through computers, with most investors choosing to route their investor orders via cable rather than call up a broker to initiate a buy or sell trade for them. More than two decades after the switch, most exchanges have done the same.

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