Overview Of The Chicago Mercantile Exchange (CME) Group

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One of the biggest advantages to trading in the futures markets is the presence of organized exchanges. Futures and derivatives exchanges provide a centralized clearing facility, thereby enabling more transparency and efficiency in the market transaction process. We will be providing a general overview of the most renowned futures trading exchange in the world, namely the CME Group.

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About The CME Group

The Chicago Mercantile Exchange is a derivatives trading exchange based in Chicago, Illinois. It has a long and rich history in the United States as a pioneer in the futures and derivatives trading arena. The CME Group, also commonly referred to as the Chicago Merc, is now a publicly traded company listed on the NASDAQ stock exchange under the ticker CME.

The origins of the CME date back to 1848. In recent years, the CME merged with the Chicago Board of Trade in 2007. And later in 2008, the CME acquired COMEX, and the New York Mercantile Exchange, NYMEX. And in 2012 the CME acquired the Kansas City Board of Trade. As such, the CME Group has become the most powerful trading exchange in the world.

The Chicago Mercantile Exchange provides a wide array of financial products. This includes contracts for futures, forwards, and options within the agricultural complex, energy markets, precious metals market, interest rate markets, stock indices, currency products and more. Based on volume traded, the CME group is considered the biggest futures exchange on the globe.

Based on recent figures is estimated that the CME Group exchanges facilitate transactions in over 3 billion contracts yearly. A value for this yearly turnover would be approximately one quadrillion dollars.

Most of the volume is done through the CME Globex platform, which is their electronic platform. A smaller percentage of transactions are done via the floor based open outcry system. The volume on latter has shrunk dramatically over the years as electronic trading has come to the forefront.

The CME Group is a regulated entity with government oversight handled by the Commodity Futures Trading Commission, CFTC. The CFTC is responsible for monitoring the activities of futures and forex entities to ensure that they are following all rules and regulations. In addition, CFTC is tasked with making sure the markets are running in an efficient and transparent manner. They act as the watchdog and enforce all regulations as it pertains to derivatives trading products.

The CME Exchange plays an important role in building and maintaining confidence among traders and investors. The Chicago Mercantile Exchange provides an environment where traders can transact in an open and fair manner, and not have to worry about counterparty risk. In addition, the CME acts to minimize price and other related market inefficiencies by aggregating large pools of liquidity through their exchange.

The CME group earns money from its operations through various fees and costs charged on every transaction. Futures and derivatives trading is a zero game, meaning that in every transaction there will be a winner and a loser. The Chicago Mercantile Exchange provides the venue for traders to transact and do business, and for that service, the Merc gets paid handsomely regardless of the outcome on any and all trading transactions.

cme-exchange-historyHistory of The CME Group

The Chicago Mercantile Exchange has become a leader in futures, forwards, and options contracts. It serves clients at each end of the spectrum from high-frequency trading firms, hedge funds and CTAs, to small farmers and retail traders. The CME futures exchange has come a long way since its founding as a butter and egg exchange.

Let’s take a look at some key historical events that marked the progress of what we know today as the Chicago Merc.

In 1898, they Chicago Butter and Egg Board was established. This will later be known as the Chicago Mercantile Exchange CME. The transition occurred in 1919. In 1961 the CME launches the very first futures contract. The contract is for frozen pork bellies. Three years later, in 1964, CME launches its first agricultural futures, specifically in live cattle. In 1972 the CME offers the first financial futures product line, and these contracts are on several major foreign currencies.

In 1981, the CME begins to offer the Eurodollar futures, which is one of the most liquid trading products in the world. And then one year later in 1982, the CME launches the very first stock index futures contracts which is on the S&P 500 index. Later in 1987, the CME develops the Globex electronic platform, which is now considered the gold standard in electronic trading technology.

In 1997, the CME launches a mini sized stock index contract known as the E-mini S&P 500. Today, this is the most liquid stock index trading product in the world. Two years later in 1999, the CME introduces the first ever futures contracts based on weather.

In 2002, the CME becomes a publicly traded company and its stock is listed on the NYSE. In 2006, a major merger deal is struck between the CME and the CBOT, which is later finalized in 2007. This creates what is known today as the CME Group, and the merger solidifies them as the largest derivatives trading exchange on the globe. In 2008 the CME purchases NYNEX, which is a leading provider of energy related products. In 2012 the CME acquires KCBT, making it a dominant market facilitator in the wheat market.

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CME Products

Chicago Mercantile Exchange offers a wide range of products to derivatives traders. This includes trading instruments within livestock and agricultural, energy, equity indexes, foreign exchange, interest rates, metals, real estate, weather, and OTC products.

Let’s take a look at the major groupings and the CME commodities or financial instruments within each category.

CME Agricultural Products – The agricultural complex consists of three major groups. This includes the grains, livestock, and softs. Grain products include corn, soybeans, wheat, ethanol, soybean oil, soybean meal, oats, rough rice, and wheat. The livestock category includes feeder cattle, lean hogs, and live cattle. And the softs include trading instruments for milk, lumber, cocoa, cotton, coffee, orange juice, and sugar. CME agricultural futures are traded heavily by commercial hedgers and farmers.  

CME Energy Products – The CME Group offers futures and options on vital energy products including crude oil, heating oil, natural gas, unleaded gasoline, coal, and electricity. Of these, the crude oil futures contracts are the most liquid, followed by natural gas futures. And for both of these, the CME offers the full-size and e-mini sized contract.

CME Equity Index Products – There is a wide array of CME equity futures and options contracts on US equity indexes including the S&P 500 Index, Dow Jones, Russell 2000, and the NASDAQ. Additionally, E-mini and a micro sized products are also available for these markets. The most liquid trading instrument within the equity index product line at the CME is the E-mini S&P futures contract. This is followed by the CME stock futures contracts in the E-mini Nasdaq.

CME Currency Products – The Chicago Merc is a leading exchange for currency derivatives. These CME futures products includes contracts for the Australian Dollar, British Pound, Canadian Dollar, EuroFx, Japanese Yen, New Zealand Dollar, Mexican Peso, and the Swiss Franc.

The most liquid currency instrument traded at the CME is the EuroFX currency. CME also offers a mini sized version of the Euro FX, however, it should be noted that at the current time the trading volume in the E-mini Euro FX is relatively low.

CME Interest Rate Products – The CME provides access to all US denominated interest rate derivative products. This includes futures and options contracts for short and long-term treasury securities, Eurodollars, interest rate swaps, and Fed Funds 30 day interest rate. Of these CME products, the 10 year Treasury note, and the 30 year Treasury bond is the most widely traded, with many millions of contracts traded daily.

CME Metals Products – Futures and options products in the metals market are traded under the CME Group umbrella at the COMEX and NYMEX exchanges. The wide range of metals trading include precious metals such as gold, silver and platinum. Moreover, traders can get access to base metals including copper, and other types of metals including iron ore, steel, and uranium.

The most liquid metals trading product at the CME is the standard gold contract, which has a contract size of 100 ounces. Silver would be the second most popular trading product within this group.

CME Real Estate Products – CME Group offers futures and options on various real estate price indexes. These are mainly regional indexes that are benchmarked to the Case Shiller Metro area home price. Some of these indices cover regional metropolitan markets in cities such as Los Angeles, New York, San Francisco, Las Vegas, and Boston to name a few.

CME Weather Products – The CME group has recently begun to offer temperature based index futures and options for a handful of US and international cities. Currently this includes eight US cities, and two European cities.

CME Cryptocurrency Products – CME has entered into the crypto space, and now offers futures and options contracts on Bitcoin. Bitcoin is the most widely traded crypto in the world. CME group introduced bitcoin futures contracts in 2019, and it has quickly become the go to venue for many crypto traders interested in trading bitcoin via a centralized exchange.

CME OTC Products – In addition to the different commodity products and financial products mentioned above, the CME group provides clearing services for credit default swaps, a dozen foreign exchange swaps, and certain interest rate swaps.

cme-technology-platformsCME Group Technology

There are four primary platforms available at the Chicago Mercantile Exchange. This includes the CME Globex electronic platform, the CME ClearPort OTC platform, the CME Direct platform, and the Elysian auction platform.

Let’s take a closer look at each of these clearing technology platforms.

CME Globex – The CME Globex is an electronic trading platform. Traders can get access to a myriad of futures and options data via this platform. This includes accessing real-time price data, and executing orders.

CME ClearPort – CME ClearPort platform offers a customized solution for clearing within the over-the-counter, OTC market. It serves to connect major players including hedge funds, banking institutions, other clearing firms, and more.

Elysian – For market players in the OTC market, CME’s Elysian platform provides order matching technology for various derivative markets including credit, interest rate, and fixed income.

CME Direct – CME Direct allows clients access to both the CME Globex and CME ClearPort platforms via a unified dashboard either directly or via a Futures Commission Merchant, FCM.

CME Futures Margin

Every futures trader should have a good understanding of how futures margin works and the different types of margin requirements at the CME Chicago Mercantile Exchange. Before we dive into the different types of margin requirements, let’s clarify what futures margin is and the practical implications of using trading margin in a futures trading account.

At the most basic level, margin refers to the amount of funds that must be available within your trading account and which is held by your broker in order to initiate a new futures position. As a result, futures margin allows you to control the notional value of a specified contract by allocating only a small percentage of that entire value.

Generally, most CME futures contracts will require an initial margin of 4% to 10% of the contract’s full value. This allows for a great deal of leverage on your CME futures trading position.

For example, let’s assume that you’re interested in trading gold via the CME Gold futures contract. Now we know that the standard gold futures contract has a contract unit size of 100 Troy ounces. If the price of gold is currently trading at $2000 an ounce, that would mean that the notional value for one CME gold contract would be $200,000, which is arrived at by calculating the price of gold, $2,000 times the contract unit size,100 Troy ounces.

If the Initial margin requirement set by the Chicago Mercantile Exchange is $10,000, then that would mean that at the minimum you would require $10,000 to control one full contract of gold with a notional value of $200,000.

As a result, a CME gold futures contract would have a 5% initial margin requirement based on this example. Looking at it another way, if you were to use the maximum margin limit, you could realize up to 20 to 1 leverage trading one gold futures contract.

Let’s now discuss the two main types of margin at the CME, which is also common to most other futures exchanges. So the two types of futures margin include the initial margin, and the maintenance margin. We have touched upon the initial margin in our earlier example.

Initial margin represents the amount of funds required by the CME or any other derivatives exchange to enter into a new futures position. Keep in mind that the CME sets these initial margin requirements on their products, but your broker may have a slightly higher requirement to offset their perceived risk.

The second type of futures margin requirement that the Chicago Merc sets is what is known as maintenance margin. Maintenance margin refers to the amount of funds that must be maintained within your trading account at all times to keep your position open.

In the event that your account balance falls below this minimum required amount, your broker will notify you immediately, at which point you will be required to add additional funds to your account, or risk your position being automatically closed out.

Because of these rules and regulations around futures margin, it’s best to use a fairly conservative amount of leverage in your trading account. A good rule of thumb is that you should attempt to size your positions based on one contract per four times initial margin requirements.

In other words, based on our gold example above, a one contract position would require $40,000, which is calculated as $10,000 initial margin times four. For those who have smaller accounts, and for whom this may not be feasible, it is suggested to consider trading smaller notional contracts. In this case that would mean trading the micro gold futures contract instead.

Download the short printable PDF version summarizing the key points of this lesson….Click Here to Download

Summary

The CME Group is a preeminent futures trading exchange, with a long history that is intertwined with the growth of derivatives trading in the United States and around the globe. The CME offers a wide range of financial instruments and services clients from the largest institutions to the smallest mom-and-pop traders.

It should be no surprise to many that CME’s most popular product line among short-term traders and swing traders is the Emini and Micro stock index futures contracts. The daily volumes and volatility characteristics of this asset class makes it a great fit for speculative traders and investors.

CME Globex, which is CME’s leading technology platform, has been one of its’ biggest success stories. Now that most trading transactions are done electronically, it will continue to be the go to platform for futures and options traders alike. As CME continues to expand its product offerings, it will be a powerhouse among global exchanges for years to come.

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