What is the Chicago Mercantile Exchange - CME

The Chicago Mercantile Exchange (CME), which is also known as the Chicago Merc, is an organized exchange for the trading of futures and options. The CME trades futures, and in most cases options, in the sectors of agriculture, energy, stock indices, foreign exchange, interest rates, metals, real estate, and weather.

BREAKING DOWN Chicago Mercantile Exchange - CME

Founded in 1898, the Chicago Mercantile Exchange began life as the "Chicago Butter and Egg Board" before changing its name in 1919. It was the first financial exchange to "demutualize" and become a publicly traded, shareholder-owned corporation in 2000.

The CME launched its first futures contracts in 1961 on frozen pork bellies. In 1969, it added financial futures and currency contracts followed by the first interest rate, bond, and futures contracts in 1972.

In 2007, a merger with the Chicago Board of Trade created the CME Group, one of the largest financial exchanges in the world. In 2008, the CME acquired NYMEX Holdings, Inc., the parent of the New York Mercantile Exchange (NYMEX) and Commodity Exchange, Inc (COMEX). By 2010, the CME purchased a 90% interest in the Dow Jones stock and financial indexes. The CME grew again in 2012 with the purchase of the Kansas City Board of Trade, the dominant player in hard red winter wheat. And in late 2017, the Chicago Mercantile Exchange began trading in Bitcoin futures.

According to the CME Group, on average it handles 3 billion contracts worth approximately $1 quadrillion annually. Some trading continues to take place in the traditional open outcry method, but 80% of trading is done electronically through its CME Globex electronic trading platform.

Additionally, the CME Group operates CME Clearing, a leading central counterparty clearing provider.

CME Futures and Risk Management

With uncertainties always present in the world, there is a demand that money managers and commercial entities have tools at their disposal to hedge their risk and lock in prices that are critical for business activities. Futures allow sellers of the underlying commodities to know with certainty the price they will receive for their products at the market. At the same time, it will enable consumers or buyers of those underlying commodities to know with certainty the price they will pay at a defined time in the future.

While these commercial entities use futures for hedging, speculators often take the other side of the trade hoping to profit from changes in the price of the underlying commodity. Speculators assume the risk that the commercials hedge.

A large family of futures exchanges such as the CME Group provides a regulated, liquid, centralized forum to carry out such business. Also, the CME Group provides settlement, clearing, and reporting functions that allow for a smooth trading venue.