What is a 'Commodities Exchange'

A commodities exchange is an legal entity that determines and enforces rules and procedures for the trading standardized commodity contracts and related investment products. Commodities exchange also refers to the physical center where trading takes place. 

BREAKING DOWN 'Commodities Exchange'

Modern commodity markets began with the trading of agricultural products, such as corn, cattle, wheat and pigs in the 19th century. Chicago was the main hub for this kind of trading, due to its geographical location near the farm belt as well as a key east-west transit point with railroad access. Modern commodity markets trade many types of investment vehicles, and are often utilized by various investors from commodity producers to investment speculators.

Two of the best known commodity exchanges in the United States are the Chicago Mercantile Exchange (CME) Group and the New York Mercantile Exchange (NYMEX), which is actually part of the CME Group. CME Group is the world's leading and most diverse derivatives marketplace, handling 3 billion contracts worth approximately $1 quadrillion annually.

In Europe the most well known commodity exchange is the Intercontinental Exchange (ICE). Similar to CME and NYMEX, ICE is an electronic commodity exchange, with no physical trading floor. In a cost competitive environment, electronic exchanges are becoming more prevalent. The only physical commodity trading exchange left in Europe is the London Metal Exchange (LME). The LME is the world center for the trading of industrial metals – more than three quarters of all non-ferrous metal futures business is transacted there.

Limitations of Commodity Exchanges

The nature of commodity exchanges is changing rapidly. The trend is in the direction of electronic trading and away from traditional open outcry trading, where traders meet face-to-face and trade in what is known as a trading pit. For example, in July 2016, CME Group closed down the NYMEX commodities trading floor, the last of its kind, after all but 0.3 percent of its energy and metals volumes shifted to computers. A year earlier, CME decided to shut down the commodity trading floor in Chicago, ending a 167 year old tradition of face-to-face trading in favor of fully electronic trading.

 

RELATED TERMS
  1. New York Mercantile Exchange - ...

    The New York Mercantile Exchange is the world's largest physical ...
  2. Chicago Mercantile Exchange - CME

    The Chicago Mercantile Exchange is a futures exchange which trades ...
  3. Commodity

    A commodity is a basic good used in commerce that is interchangeable ...
  4. Exempt Commodity

    An exempt commodity is any commodity other than an excluded or ...
  5. Commodity ETF

    A commodity ETF is an exchange-traded fund that invests in physical ...
  6. Commodity Price Risk

    Commodity price risk is price uncertainty that adversely impacts ...
Related Articles
  1. Investing

    Commodities trading: An overview

    Trading commodities can seem challenging to a novice trader but we break it down for you. Learn more about the history of commodities, the types of commodities, and how to invest in them.
  2. Investing

    All About Liquid Commodities

    You might hear 'liquid commodities' and think of an auction, but they're actually a high-volume, fast paced financial product suitable for day traders.
  3. Investing

    Commodities Without Worries

    ETFs have made commodities investing easier, but look before leaping.
  4. Investing

    Commodities: The Portfolio Hedge

    These diverse asset classes can provide downside protection and upside potential. Here's how to use them.
  5. Investing

    The Role Of Speculators In The Commodity Market

    Contrary to popular belief, speculators are important for the market. Find out exactly what they do.
  6. Investing

    Investing In Commodities Without the Hassle: Try Commodity ETFs

    Exchange-traded funds (ETFs) that invest in commodities offer a convenient, low cost way to access the commodities markets.
  7. Investing

    3 Reasons to Invest in Discounted Commodities

    Though they're selling at depressed prices, there are several reasons that it could make sense to invest in commodities now.
  8. Investing

    3 ETFs That Suggest Commodities Are Headed Lower (COMT, DBC)

    Nearby trendlines and resistance from major moving averages suggest that the broad commodities market is headed lower from here.
  9. Investing

    What are Commodities?

    A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Commonly traded commodities include gold, beef, oil, lumber and natural gas. Additional ...
RELATED FAQS
  1. How can electricity be traded as a commodity by an individual investor?

    Learn the characteristics unique to electricity trading as a commodity and how investors can trade electricity futures on ... Read Answer >>
  2. What types of futures contracts are typically sold on an exchange?

    Explore the wide variety of available futures contracts traded on exchanges, which range from agricultural commodities to ... Read Answer >>
  3. What are tradable commodities?

    Understand what tradable commodities are as well as the rules and risks governing how they are sold and traded in the marketplace. Read Answer >>
  4. Why are Traders on the Floor of the Exchange?

    Learn how trading on the floor of the stock exchange has evolved over time with computers now managing the majority of buying, ... Read Answer >>
Trading Center