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What Is the Chicago Mercantile Exchange (CME)?
The Chicago Mercantile Exchange (CME) is an organized exchange for futures and options trading. The CME trades futures, and in most cases options, in the sectors of agriculture, energy, stock indices, foreign exchange, interest rates, metals, real estate, and even weather.
Opened in 1898 as the Chicago Butter and Egg Board, the CME is a publicly traded and shareholder-owned corporation.
Key Takeaways
- CME, originally the Chicago Butter and Egg Board, now trades in sectors like agriculture, energy, and cryptocurrencies.
- Founded in 1898, the CME became a publicly traded corporation in 2000.
- The CME merged with the Chicago Board of Trade in 2007, forming CME Group, one of the largest exchange operators.
- CME handles 3 billion contracts annually, with a total value of about $1 quadrillion.
- The Commodity Futures Trading Commission regulates the CME, overseeing derivatives and commodities trading in the U.S.
The Evolution and Impact of the Chicago Mercantile Exchange
Founded in 1898, the Chicago Mercantile Exchange began life as the “Chicago Butter and Egg Board” before changing its name in 1919. It was the first financial exchange to “demutualize” and become a publicly traded, shareholder-owned corporation in 2000.
The CME launched its first futures contracts in 1961 on frozen pork bellies. In 1969, it added financial futures and currency contracts, followed by the first interest rate, bond, and futures contracts in 1972.
The Formation of CME Group: A Major Merger Milestone
In 2007, a merger with the Chicago Board of Trade created the CME Group, one of the largest financial exchanges in the world. In 2008, the CME acquired NYMEX Holdings, Inc, the parent of the New York Mercantile Exchange (NYMEX) and Commodity Exchange, Inc (COMEX). By 2010, the CME purchased a 90% interest in the Dow Jones stock and financial indexes.
The CME grew again in 2012 with the purchase of the Kansas City Board of Trade, the dominant player in hard red winter wheat. In late 2017, the Chicago Mercantile Exchange began trading in Bitcoin futures.
The CME Group handles about 3 billion contracts each year, valued at roughly $1 quadrillion. In 2021, CME Group stopped open outcry trading for most commodities, but continued it for Eurodollar options. The CME Group also operates CME Clearing, a top provider of central counterparty clearing.
$1 quadrillion
The approximate total value of all CME contracts in one year.
Managing Risk with CME Futures: An Overview
With uncertainties always present in the world, there is a demand that money managers and commercial entities have tools at their disposal to hedge their risk and lock in prices that are critical for business activities. Futures allow sellers of the underlying commodities to know with certainty the price they will receive for their products at the market. At the same time, it will enable consumers or buyers of those underlying commodities to know with certainty the price they will pay at a defined time in the future.
While businesses use futures for hedging, speculators often bet on price changes to make a profit. Speculators take on the risk that businesses try to avoid. The CME Group, part of a large family of exchanges, offers a regulated forum for trading. Also, the CME Group provides settlement, clearing, and reporting functions that allow for a smooth trading venue.
Fast Fact
CME is one of the few regulated markets where you can trade Bitcoin futures.
Regulatory Oversight of the CME: Ensuring Market Integrity
CME is regulated by the Commodity Futures Trading Commission, which oversees all commodities and derivatives contracts in the United States. The CFTC is responsible for oversight of brokers and merchants, conducts risk surveillance of derivatives trades, and investigates market manipulation and other abusive trade practices. It also regulates trading in virtual assets, such as Bitcoin.
Comparing CME and CBOT: Key Differences and Historical Context
The Chicago Board of Trade (CBOT) is another Chicago-based futures exchange, founded in 1848. The CBOT initially allowed agricultural products like wheat, corn, and soybeans to be traded. It later added financial products such as gold, silver, Treasury bonds, and energy. The CME merged with the CBOT in 2006, in a move approved by shareholders of both organizations.
Unique Trading Opportunities at the CME: The Case of Weather Derivatives
Most commodities can be traded anywhere, but there’s one you can only trade at the CME: weather. CME is the only futures exchange to offer derivatives based on weather events, allowing traders to bet on cold temperatures, sunshine, or rainfall. In 2020, the CME traded as many as 1,000 weather-related contracts per day. The total notional value of futures totaled $750 million, while the total notional value of options totaled $480 million.
How Active Is the Chicago Mercantile Exchange?
The CME is the largest futures and options exchange by daily volume. According to CME Group, the exchange handles 3 billion contracts per year, worth approximately $1 quadrillion.
How Big Is the Chicago Mercantile Exchange?
As of March 2022, the Chicago Mercantile Exchange reported almost $206 billion of total assets and just over $178 billion of liabilities. At the end of 2021, CME group had 3,480 employees and offices in more than 15 countries.
How Much Money Does the Chicago Mercantile Exchange Make?
Through the first quarter of 2022, CME had generated $711 million of net income, approximately $136 million more than the same period last year. CME Group reported a net income of $2.6 billion in 2021, with total revenues of $4.7 billion.
The Bottom Line
The Chicago Mercantile Exchange (CME) is a leading futures exchange trading in diverse sectors such as agriculture, energy, stock indices, and cryptocurrencies. The CME is regulated by the Commodity Futures Trading Commission (CFTC), and ensures secure and reliable trading environments for both hedgers and speculators.
Known for its innovations, CME was the first to introduce financial futures and currency contracts and is a pioneer in trading unique commodities like Bitcoin futures and weather derivatives. Its role in risk management provides financial stability by allowing market participants to hedge against price volatility.
The CME opened in 1898 as the Chicago Butter and Egg Board and has evolved into a major player in the global derivatives market. CME Group, formed after merging with the Chicago Board of Trade in 2007, manages approximately 3 billion contracts annually, valued at around $1 quadrillion.
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