The Chicago Board of Trade Essay

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Updated: Mar 16th, 2024

Introduction

The Chicago Board of Trade (CBOT) was established in 1848 and it has been considered the world’s oldest financial exchange company that serves millions of people all over the world. It provides financial exchange where people can buy or sell standardized contracts that can be used to purchase quantities of a financial instrument at a particular price in the foreseen future (Ryan, 2005).

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According to Ryan (2005), Chicago is situated at the base of the Great Lakes in a location that has been used to produce crops and rear livestock and this has enabled it to be a suitable center for producing, transporting as well as distributing agricultural products. In the mid 19th Century, there was a great shortage of these agricultural products and this led to the establishment of a market that would enable agricultural companies, sellers as well as processors to carry out their trade as well as be protected against future losses through price reductions. Forward contracts were established so that buyers and sellers could carry out their trade and still earn good profits even when the markets were low.

The board’s growth

Forward contracts acted as the basis to trade during the 1840s in Chicago. A forward contract was defined as an agreement between two people, the buyer, and the seller, to trade in a commodity at a specified time in the future. Predictions were made for the prices and these prices were used when that time in the future matured. In 1848, the Chicago Board of Trade was established to assure their customers against future risks. The board operated in terms of forwarding contracts and the first contract was developed in 1851. However, with time the contracts were seen to be ineffective because they were standard at that time and were dishonored by buyers and sellers especially when the price of delivery in the future differed from that of the original agreement. This led to the introduction of standardized future contracts in the year 1865 (Ryan, 2005).

Ryan (2005) defines a future contract in the Chicago Board of Trade as a standardized agreement that is traded to buy or sell a particular quantity of a commodity whose quality is also specified. These commodities may be in form of government bonds and treasures, foreign currencies, or other financial instruments. The future prices in the future contracts were determined by the equilibrium between the market forces of demand and supply at the time of exchange of the contract. Future contracts give the contract holders the responsibility to trade in different commodities under the terms and conditions given in the contract. The holder is also assured of protection against any future risks arising as a result of price instabilities.

The Chicago Board of Trade, therefore, took shape to provide services to its members and it has served many people all over the world ever since. In 1919, the board led to the development of a sub-branch referred to as the Chicago Butter and Egg Board which later changed its name to Chicago Mercantile Exchange (CME). It also enabled its members to trade in futures contracts. Since then, the CME and the CBOT have merged to form a new body referred to as the Chicago Mercantile Exchange Group (Ryan, 2005).

Activities of the CBOT

The CBOT mainly deals in offering future contracts on agricultural products. Many producers in Chicago and in other parts of the world have joined the board and are taking part in the buying and selling of future specified commodities. The board carries out its activities of trade by bidding their commodities or by offering a specific price for a certain quantity of a commodity. This is normally done by physically representing the trader’s intentions through actions. For example, if a trader would like to buy ten contracts at a price of eight, he/she would shout the bid, stating the price before quantity, and then turn his palm inward toward his face, placing one finger to his forehead to indicate ten. If the traders wanted to bid five contracts at a price of eight, they would shout the bid, stating quantity before price, and show one hand with the palm facing outward, showing five fingers. The use of both signals and vocal representation enabled the trader to be clearly understood by other participants in the market without causing any misinterpretation (Ryan, 2005).

According to Durica (2006) the board has also offered new methods of trading as a result of increase in demand for the markets. They have established online data that will enable traders to make their bids through the electronic data which is more up-to-date and accurate. The electronic trading will reach greater numbers of people all over the world and will save on time used to bid physically. The CME Group that was formed as a result of the merging of CBOT and CME has provided an efficient and competitive market for its traders. It has been able to assure its customers of protection against future risks and it has also provided financial integrity all over its areas of operation.

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According to Durica (2006), the electronic trading of the Chicago Mercantile Enterprise Group offers a number of capabilities for traders to enhance their trading activities. The electronic marketing also enables customers to be able to choose from a wide range of products from all classes and in all the combinations. As one of the major activities of the board, the electronic trading has been seen to have the following benefits:

  1. Promotes quick response time that enhances time-saving in the trading business.
  2. Creates transparency in the prices and therefore enhances the reliability and integrity of the markets.
  3. Improves functionality and the market capacity for all its clients without creating inefficiencies in terms of market or product mismatch.
  4. Provides up-to-date information on market data. This is because any changes that occur are detected and made in time and the electronic devise ensures that all people access the recent data as soon as it is created.
  5. Enhances creditworthiness of clients as all relevant data is presented on-line and this is one way of enhancing transparency and improving creditworthiness among clients.

Products of the CME Group

The board offers markets for products like the commodity products, that is, the farm products; energy products like oil and petroleum commodities; metal products, real estates, weather products and the equity index products which deal with the exchange markets. The board provides venues for trading the products and it also offers assurance against risk while marketing the products. Electronic trading and open outcry trading (open bids) are the major methods used to obtain markets for these goods (Durica, 2006).

The Group products ensure transparency, eliminate credit risk and provide a firm foundation for all the board’s transactions. The group products also allow for equity index futures and options that facilitate access to the global electronic markets and in turn guarantee credit worthiness through the Chicago Mercantile Exchange clearing. This way, customer relations are enhanced and the group is able to create larger markets for more customers without losing their confidence. The wide range of products offered by the board provides a wider base for risk management and for the distribution of any unforeseen risks (Ryan, 2005).

Conclusion

In conclusion, it can be seen that the development of the Chicago Board of Trade has led to improvement in the trading o future commodities and options. It has been one the most successful boards that has withstood all the market challenges and at the same time gained investor trust. Through its risk management strategies, the group has been able to capture markets all over the world and it aims at serving its customers with a global product line so that it can cater for the needs of people all over.

The CME Group has therefore established a collective vision that that focuses on the prevailing global growth and enhancing innovative development of products as well as providing the best services in the exchange market with the improved technology. The group offers future contracts and options based on current rates of interest equity price indices, foreign exchange agricultural products, energy and other commodities.

The CME Group also guarantees the creditworthiness of all the transactions that take place and it is through this that it has been able to improve its trading activities and achieve the desired objectives.

Works Cited

Durica, M (2006). Product Development for Electronic Derivative Exchanges: The case of the German for Business Climate index to hedge business cycle risk: Berlin; Pro Business.

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Ryan, O. Chicago’s making a Contract’s Killing, 2005.

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IvyPanda. (2024) 'The Chicago Board of Trade'. 16 March.

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IvyPanda. 2024. "The Chicago Board of Trade." March 16, 2024. https://ivypanda.com/essays/the-chicago-board-of-trade/.

1. IvyPanda. "The Chicago Board of Trade." March 16, 2024. https://ivypanda.com/essays/the-chicago-board-of-trade/.


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IvyPanda. "The Chicago Board of Trade." March 16, 2024. https://ivypanda.com/essays/the-chicago-board-of-trade/.

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