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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

E-CBOT

What it is:

The e-CBOT is an automated trading platform for trading futures on the Chicago Board of Trade (CBOT).

How it works (Example):

The CBOT is a commodities futures and commodities options exchange. Several dozen types of contracts trade on the CBOT, and the exchange facilitates hundreds of millions of these trades each year. The CBOT opened on April 3, 1848. On October 18, 2005, the CBOT became a for-profit business with shares listed on the New York Stock Exchange (the ticker is BOT). Note that the CBOT is not the same as the Chicago Board Options Exchange (CBOE), which is primarily for stock options.

 

The CBOT trades futures and options contracts for metals and agricultural and financial products. The agricultural products include flour, corn, rice, hay, soybeans, wheat, silver, gold and ethanol; the financial derivatives such as emission allowances, interest rate swaps and futures, and Dow Jones index futures and options on futures.

CBOT traders buy and sell contracts by bidding or offering a price and a quantity of contracts. For most of the CBOT’s life, trading took place via open outcry in one of the CBOT’s many octagonal trading pits. The traders in the pit announce the number of contracts they want to buy or sell and the price they want to pay or receive. They use their fingers to denote the quantity of contracts. When the trader’s palm faces out, he is trying to sell contracts. When the trader’s palm faces in, he is buying. This open outcry system is one of the most well-known images associated with the financial world.

In recent years, however, the CBOT has modernized and introduced electronic trading via the e-CBOT. Now investors can trade using either the open outcry or electronic method. However, the e-CBOT has allowed most daily contracts to trade electronically instead.

Like the New York Stock Exchange, one must have a membership to trade the various products listed on the exchange. Although the CBOT’s thousands of members can only trade via open outcry from 7:20 a.m. to 3:15 p.m. Monday through Friday, the e-CBOT’s trading day is 22 hours long.

Why it Matters:

The e-CBOT, and the futures market it facilitates, is important because it gives its participants a way to manage risk. These participants, called hedgers, buy or sell futures contracts to protect themselves against unfavorable price changes (they might be corn growers or bread companies, for example). But there is another type of participant in the market: the speculator. Speculators simply bet on which way prices are going to go. Although they don’t want to physically possess any of the commodities they’re trading (that is, they don’t really want a truckload of rice in two months), their trading activity is important because it brings liquidity to the market.

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