What Is the e-CBOT?

The e-CBOT is an electronic trading platform operated by the Chicago Board of Trade (CBOT). It is primary used by traders wishing to speculate and hedge against risks in the commodity futures and financial derivatives markets.

Key Takeaways

  • The e-CBOT is the current electronic trading platform operated by the CBOT.
  • It replaced the physical trading pits that used to be used, which were staffed by human traders.
  • Today, trading in the e-CBOT is handled mostly by computers, and brings together hedgers and speculators in the commodity futures and financial derivatives markets.

Understanding the e-CBOT

The e-CBOT is popular among traders in the futures markets who wish to transact in commodities such as precious metals, agricultural goods, and energy products. For these traders, commodity futures can be a convenient way to lock in supply of a particular good at a manageable price in order to protect themselves against the risk of costly and fluctuations in the commodities markets.

By way of example, a commercial bakery might purchase wheat futures in order to guarantee an affordable supply of wheat over the next year. If the price of wheat rises during the year, the bakery can exercise their futures contract and take delivery of wheat at the predetermined price. On the other hand, if wheat prices fall, then the bakery is free to purchase wheat at a lower cost on the spot market.

In other cases, traders can use the e-CBOT and other futures markets to speculate on commodities prices. For instance, a trader without a direct need for oil might nonetheless purchase oil futures based on the anticipation that oil prices will rise during the investment term—perhaps due to factors such as geopolitical events or an anticipated decline in production volumes. From the perspective of other market participants, these speculators can increase overall market efficiency by contributing additional liquidity to the marketplace.

In addition to commodity futures contracts, the e-CBOT is also used to trade financial derivatives, such as interest rate swaps, index futures, and options. These products can be useful not only as a means of speculating on market prices but also as a way for investors to hedge their exposure to various market risks. For example, an investor with a large position in a particular company might purchase put options in that company so that they can sell that company's shares at a relatively high price in the event that its value declines significantly.

Real World Example of the e-CBOT

The history of the CBOT dates back to 1948, at which time all of its trading was done using the conventional method of physical trading floors, also known as "pits." In these trading floors, human brokers would buy and sell using the "open outcry" method, which involved manually calling out the price at which you are willing to buy or sell a particular security.

Similar to an auction process, traders would use various signals as shorthand for different kinds of orders. For instance, if a trader's palm was held with its face out, this would signal a desire to sell a particular security. If the palm was facing inward, this would signal a desire to buy. Various other signals were also used to indicate the quantity and price of the buy or sell order.

For example, a trader who wants to buy ten contracts at a price of eight would call out "eight-for-ten," stating the price before quantity. The trader would turn a palm inward toward their face and point an index finger to their forehead to indicate a 10-contract quantity. If a trader wanted to buy one contract, they would point an index finger to their chin.

The modern e-CBOT, on the other hand, has mostly replaced this method of open outcry transactions. Today, most daily trading is completed by way of automated systems, in which the process of matching buyers and sellers is handled automatically and almost instantaneously by advanced computerized systems.