1.3.1. The Futures Exchange
An exchange is a member organization that provides a regulated marketplace in which securities (e.g., New York Stock Exchange), options (e.g., Chicago Board Options Exchange), and futures (e.g., Chicago Mercantile Exchange) can be bought and sold. Unlike securities exchanges, members of a futures exchange are most often individuals, though they can be institutions as well. The members of the exchange elect a board of directors, which selects a management team. Exchanges provide a location, such as a trading floor or computerized trading platform, where members can trade their securities or contracts. While securities exchanges must register with the Securities Exchange Commission (SEC), derivatives exchanges must register with the Commodity Futures Trading Commission (CFTC).
A futures exchange not only provides a trading location, but it also creates and defines the products that can be traded. It designs new products and presents them to the CFTC for approval before initiating trading. The CFTC will examine the need for the futures contract, the robustness of its cash market, and the ease by which the new product may be effectively regulated.
Until recently, the primary futures exchanges in the U.S. were the New York Mercantile Exchange (NYMEX), the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME or the Merc), and the New York Board of Trade (NYBOT). In 2007 the Chicago Board of Trade, NYMEX, and the CME all merged to form the CME Group, though the merged companies have kept their separate identities. Today, the CME trades mostly in foreign exchange and stock index futures, the CBOT focuses on agricultural commodity and interest rate futures, and NYMEX on energy futures and metals. These exchanges operate both on the open outcry system, with traders shouting their customers’ orders at each other on the trading floor, and electronically.
Also in 2007, Intercontinental Exchange (ICE) bought the New Yo