Concept and essence of commodity exchange. Features and mechanism of commodity exchange. Exchange goods. Organization of stock exchange trading. Exchange's operations

Date: 2015-10-07; view: 512.

Theme 3. Commodity exchanges and auctions in international trade

1. Concept and essence of commodity exchange. Features and mechanism of commodity exchange. Exchange goods. Organization of stock exchange trading. Exchange's operations.

2. Concept and essence of auctions. Features and differences of trade through auctions, the mechanism of work of auctions. Auction goods. Organization of auction trade. Methods of the biddings at auctions.

3. Stock exchange and auction trading by agricultural goods.

Commodity exchanges, or futures exchanges, are, like stock exchanges, membership organizations. Their mission is to provide a suitable place where members trade commodities (futures) or options on futures in a controlled, orderly manner. The exchange itself is not a principal to any futures transaction, nor does it trade for its own account. Except for developing, publishing, and enforcing trading rules, including the establishment of daily price limits to ensure fair and equal treatment for all market participants, the exchange does nothing to determine prevailing prices in the market.

The first organized commodity exchange in the United States was the Chicago Board of Trade (CBOT), founded April 3, 1848. When first established, the CBOT was a centralized cash market formed in response to the need for a central marketplace that would bring together large numbers of buyers and sellers; thus providing liquidity, as well as bringing traders together in a place that provided rules for ethical trading practices and reliable standards of weights and measures. Soon after the founding of the exchange, grain brokers began trading in "cash forward contracts" in order to assure buyers a source of supply and sellers the opportunity to sell 12 months a year. As use of cash forward contracts escalated, futures contracts evolved.

Generally, membership on an exchange is individual, and only members may buy and sell futures and options on the exchange trading floor. Administration of the day-to-day operations of the exchange is handled by a paid staff. Members make the ultimate decisions, however, first by committee approval, then by passage by the board of directors or board of trustees. Administrative decisions are subject to full membership vote.

The heart of the exchange is the exchange trading floor, where a specific area, known as a pit or ring, is designated for the trading of each commodity. Bids (propositions to buy a specific quantity of a commodity at a stated price) and offers (propositions to sell a specific quantity of a commodity at a stated price) are made by open outcry. As each transaction is completed in the pit, a pit reporter records it; this information is immediately displayed on the trading floor quotation board and also appears on computer screens in brokerage offices and trading centers worldwide. Each trade is also recorded by the participating member on trading cards; each entry shows the amount bought or sold, with whom the trade was made, the price, and the trading bracket (time period) in which the trade was made. These cards enable each member to recheck his trades, as every trade must be resolved before the start of trading the following day.

The United States hosts five of world's largest top ten exchanges by number of contracts traded. The Chicago Board of Trade (CBOT) is the world's largest exchange, with over 281 million contracts traded in 1998,40 percent of which were futures on U.S. Treasury bonds. Other major U.S. exchanges include, in descending order by volume, the Chicago Mercantile Exchange (CME), the Chicago Board Options Exchange (CBOE), AMEX Commodities, and the New York Mercantile Exchange (NYMEX). The top two U.S. exchanges represent almost 80 percent of U.S. trading volume. Major international exchanges include the London International Financial Futures and Options Exchange (LIFFE), the world's second-largest; Brazil's Bolsa de Mercadorias & Futuros.

A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts.

Commodities exchanges usually trade futures contracts on commodities, such as trading contracts to receive something, say corn, in a certain month. A farmer raising corn can sell a future contract on his corn, which will not be harvested for several months, and guarantee the price he will be paid when he delivers; a breakfast cereal producer buys the contract now and guarantees the price will not go up when it is delivered. This protects the farmer from price drops and the buyer from price rises.

Speculators and investors also buy and sell the futures contracts in attempt to make a profit and provide liquidity to the system. However, due to the financial leverage provided to traders by the exchange, commodity futures traders face a substantial risk.

Main commodity exchanges worldwide: