A commodity exchange is an organised, regulated market that facilitates the purchase and sale of contracts stipulating the delivery of commodities, such as Brent Crude oil or corn, at a future date decided by the involved parties and subject to rules agreed by members and management of the exchange. A commodity exchange market may also be used to sell contracts for financial instruments such as Eurodollars or U.S treasury bills. Options and indexes are also traded here. Commodity exchanges are responsible for creating, maintaining and enforcing the rules of trade for all those involved in the market. They are responsible for ensuring that the price limits set each day for each commodity promote fair treatment to the participants in the commodities exchange. Despite this, however, commodity exchanges do not determine the prevailing prices or the general trends and behaviour of the market.
The operation of a commodity exchange is similar to that of the stock markets. At the centre of the exchange lies the exchange trading floor, where all non-electronic commodity trading takes place. These exchange floors are divided into several sections, each devoted to the trading of a single commodity. These sections are known as either a pit or a ring. In these pits traders stand facing each other, and subsequently make bids and offers to one another. ‘Bids’ here refers to making a proposition to buy a set amount of a certain commodity at a set price, and ‘offers’ is the proposition to sell a set amount of a certain commodity at a set price. When a successful transaction is made between traders, the information is immediately transferred on to the massive trading floor quotation board while simultaneously being distributed to the relevant trading centres worldwide. In order to ensure the transaction has proceeded smoothly and correctly, the participants involved in the particular transaction record all the pertinent details such as amount sold, price and when the transaction took place. This is for two reasons: it allows traders to check and recheck all their transactions, and every trade must be concluded on the same day that it has been initiated.
The traders on the exchange floor who embark on these deals must be members of the commodity exchange, else they must conduct their business by way firm of commodity brokers trading on their behalf. This is frequently the case with commodity producers and investors.
There are 48 large international commodity exchanges in operation across the globe, each specialising in different commodities. Most are multi commodity exchanges, dealing in more than one commodity. Some examples of these main international exchanges are:
- The Chicago Mercantile Exchange (also known as CME). This particular exchange is one of the largest and has been in operation for over 100 years. It primarily trades in organic commodities, such as dairy products, meat, fertiliser and livestock. It also trades in financial instruments such as interest rates and stock indexes.
- The New York Mercantile Exchange (NYMEX). This is one of the oldest national exchanges in the United States and trades mainly in petroleum and metal products.
- The New York Board of Trade (NYBOT). This was the first commodity exchange established in the U.S, and like many others it is a multi commodity exchange. It trades in perishable commodities such as coffee and sugar, as well as many agricultural items.
- The London Metal Exchange (LME). This is one of the largest, if not the largest, commodities exchange for the trading of base metals. It does not however, contrary to popular opinion, trade in gold and silver.
- The Tokyo Commodity Exchange (TOCOM). This exchange trades in all the commodities of Japan, including precious metals (gold, silver, platinum) and oil.
There are also a number of commodity exchanges in developing countries that are approaching the first rank, such as India’s Multi Commodity Exchange, China’s Shanghai Futures Exchange and Brazil’s BM&F Bovespa. These exchanges are essential motors of the rapid growth experienced by these emerging economic superpowers.