Commodities and Futures Market – In And Out

The futures and commodities market was originally established in the United States in the late 1800s. The original intent was to help smooth out major price fluctuations that occurred when there were either shortages or surpluses in the marketplace. At the time, international commerce on the scale that it has reached in the past two hundred years was unfathomable. Today, trillions of dollars in raw materials and finished goods traverse the globe at a frenetic pace.

While the United States was not the first to lead the world in the industrial revolution, it became the key architect in the development of the world’s international commerce that we enjoy today. The United States’ influence has brought about a financial model that is being emulated across the globe. Countries all over, such as the economically motivated European Union, as well as India and the politically communist but economically capitalist China, are developing their market economies as quickly as they can. While these countries are important, they are just the tip of the iceberg in the number of countries working hard to build up their burgeoning market economies.

In the wake of this robust global economic growth, the once-humble beginnings of the U.S. futures and commodities exchanges have taken on a new role. As raw materials from various countries must compete against one another, currency rate fluctuations, and the economic reality of interdependent economic policies, futures and commodity exchanges have popped up all over the globe. Commodities contracts such as soybeans, oil, and gold, once dominated by the U.S. exchanges, the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), and the New York Mercantile Exchange, have found themselves sharing space and multiple time zones with newly formed exchanges in India, China, and Dubai.

Where once the U.S. exchanges held a virtual monopoly in offering commodity and futures exchange contracts, they are now faced with fierce competition from various exchanges in other countries and the entrance of new players onto their domestic soil. As opposed to being leaders, they are now pressed into taking a reactionary role. Where once their contracts set the tone in volume and price discovery, many other similar contracts are beginning to gain prominence worldwide and are dictating price and market relevance.

In the midst of all of this is the trader. Whether retail or professional, the growth of the 24-hour global trading marketplace is playing a significant role in determining everyone’s long-term success. The trader’s ability to adapt to information, both technical and fundamental, as well as his ability to be serviced in multiple marketplaces are becoming more and more relevant. There is no special secret to trading in this new environment; it simply becomes more important that you be able to process information, while at the same time being able to protect yourself from activities occurring halfway across the world while you sleep.

Here we explore the recent merger of the CBOT and CME and what it means to the everyday trader’s activities. We also take a look at the various new exchanges popping up across the United States and abroad. In addition, we look at the future of single-stock futures (SSFs) in the United States and their international counterparts, contracts for difference (CFDs), and discover which one is more relevant.

Next, we look at the impact that the over-the-counter (OTC) forex market has on the exchange-traded currency markets, if any. We also discuss the revolutionary importance of the Standard Portfolio Analysis of Risk (SPAN) risk management system and the natural interaction of the spot, futures, and options markets. We take an honest look at the difficulties of trading these various markets in real time and in back-testing, both of which are important in order to develop the necessary tools to succeed.

Finally, we highlight the five key markets that will be used as examples throughout the book (S&P 500, gold, oil, euro, and corn). While these are not the only markets in the world to trade, many of these are traded in multiple arenas and time zones and are affected on a global scale by policies and regulations that do not originate in the United States.


In the spring of 1848, little did the original 83 merchants of the Chicago Board of Trade know that they would forever change the world. From this humble beginning the asset class of derivatives has exploded. Nobel Prizes have been awarded to mathematicians who have come up with formulas to predict the behavior of option derivatives. Companies have come and gone, almost taking entire economies with them, trying to beat derivatives. Countries that once banned commodity trading are now jumping on the bandwagon. All of this activity has forced commodity exchanges to grow from trading just agricultural products to trading a wide array of financial, climate, and currency products that could not even have been imagined 160 years ago.

The success of the derivatives asset class is fueled solely by traders worldwide wanting to participate in markets that they could not afford otherwise. The versatility of the commodity exchange model has moved it so far from its original roots as to almost confuse those who are familiar with agricultural commodities and stocks into believing that the products being presented to them are somehow different from what they have been trading all along. This is not the case.

Since the inception of the forward contract, there have been two markets for it. There have been the standardized contracts, what we know as futures contracts, and the customized contracts, what we know as over-the-counter (OTC) contracts. Whereas the liquidity of the standardized contracts has always been guaranteed by the exchanges themselves, the OTC market was thought to be nearly illiquid because of its customization. Since two counterparties are agreeing to an arrangement with very specific criteria, it was thought that it would be difficult to find anyone else who would be willing to accept the same terms. The OTC markets, realizing the dilemma, decided to take a page out the commodity exchange handbook and simply standardize the sizes and increments of their custom contracts. Consequently, they have added a tremendous amount of volume to their activities. OTC forex trading is a prime example of that; it currently trades approximately $2 trillion worth daily, all between counterparties with no central pricing exchange.

The far-reaching effects of the commodity exchange model have quite literally changed the world. Largely because of passage of the Commodity Futures Modernization Act of 2000 (CFMA), there are exchanges all over the world that will allow you to trade on various future events, like presidential elections, greenhouse gas emissions, and the weather. The Commodity Futures Modernization Act paved the way for OTC trading of energy credits and electronic energy trading, along with the development of single-stock futures. There are exchanges that have tapped into these simple expansions of power in new and amazing ways. They have developed ways to minimize traders’ losses by stylizing their product offerings through so-called binary futures and binary options, along with developing all-electronic trading markets.

No matter what the product is or how it is administered, the same elements always apply: The contracts are leveraged, the product traded is not the actual product, and the product is primarily designed to manage unseen risk.

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