Commodities Exchange

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.