The Chicago Mercantile Exchange or the CME is the second-largest exchange in the world where you can trade on futures and options. It’s the largest exchange in the United States and trading is usually associated with currency, interest rates, stock indices, equities, and a few agricultural products (butter, cheese, fertilizer, hogs, milk and lumber).
Originally called the Chicago Butter and Egg Board, the CME was the first financial exchange to demutualize and evolve into a shareholder-owned corporation.
Trading in futures and futures options are quite popular as its a way to protect yourself from the negative impact of price changes (of physical commodities and financial instruments).
The Chicago Board of Trade or CBOT and the CME share a similar history, but they focused on different investments and conducted it in a different manner.
But all this changed once they merged into the CME Group which includes both COMEX and NYMEX in its designated contract markets.
At the CME (or the Merc as its sometimes referred to), traders buy and sell contracts by offering a price and quantity for the contracts, or by bidding on it.
The CME is just like the New York Stock Exchange (NYSE) as you have to first become a member to engage in trading. However, holders of the CME’s Class B shares are allowed to lease their trading right to a third-party. These only number in the thousands and aren’t listed anywhere else.
The Class A shares add up to the millions and trade only on the NYSE. It is represented by equity ownership in the CME.
The Chicago Mercantile Exchange and the futures market that is facilitated are important for investors as it enables them to manage their risk. The participants (like farmers) at this exchange are called hedgers who buy and sell contracts to protect themselves from negative changes in prices.
Further, there are also other participants at the CME who are speculators. These types of investors speculate on the movement of prices. They do this even though they never physically possess any of the products that they trade. This is important as it adds liquidity into the futures market.
So whether it’s commodities like cheese and butter or interest rates and foreign currency, the CME can play an important role in your investment portfolio.