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

New York Board of Trade (NYBOT)

What it is:

The New York Board of Trade (NYBOT), founded in 1870, is a physical commodity futures exchange located in New York City. The NYBOT trades options and futures on cotton, sugar, coffee, orange juice, and cocoa, as well as interest rates, market indexes, and currencies.

How it works (Example):

NYBOT originated as the New York Cotton Exchange (NYCE).

NYBOT was renamed the ICE Futures U.S. in September 2007, and it is a wholly owned subsidiary of the Intercontinental Exchange (ICE). The floor of the NYBOT is regulated by the U.S. Commodity Futures Trading Commission (CFTC), a market watchdog agency.

Independent brokers from each company that trades on NYBOT are sent to the floor to trade.On the NYBOT, contracts are traded to buy or sell commodities, currencies and other instruments, at a stated price at a stated time in the future. These contracts are traded in a freewheeling "trading pit". It's in these frenetic environments where traders determine futures prices, which change from moment to moment.

These contracts are just that: contracts. It’s important to remember that investors never really buy any agricultural commodity. They buy and sell contracts that allow them to control the underlying asset, but cash is almost always the only thing that is exchanged between the parties.

Why it Matters:

Trading on an exchange like NYBOT is a way for investors to wield enormous "leverage." Options and futures contracts deploy leverage that can turn a small or modest bet into a huge win -- or loss. Most exchanges like NYBOT require traders to post margin of only 5%, which means to make a trade, a trader only has to put up 5% of the contract value. With a relatively small amount of money, an investor can control a large quantity of the underlying asset (say, actual cocoa).  That's a small stake, because prices can easily and quickly move by much more than 5%, even in a day's time.

In the abstract, the NYBOT helps the market sort out imbalances, by letting traders use market forces to eventually arrive at realistic prices for certain goods and financial instruments.

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