What's the difference between a stock exchange and a futures exchange?

At a stock exchange, the stocks bought and sold represent partial ownership in the company, which originally issued the stock. At a futures exchange, contracts are bought and sold. The contracts are standardized as to quality, quantity and delivery time and location. The only variable is price, which is "discovered" in trading on the exchange floor. The contracts represent the intent to accept or deliver a quantity of a commodity, for example, corn, soybeans, or Treasury bonds, at some future date.

Why do we need futures markets?

The price you pay for goods and services depends to a great extent on how successful businesses are in managing risk. By using the futures market effectively, businesses can minimize their risk, which, in turn, lowers their cost of doing business. This savings is passed onto you, the consumer, in the form of lower prices for food and other commodities, or a better return on a pension or investment fund.

What is a futures contract?

A futures contract is a binding, legal agreement to buy (take delivery) or sell (make delivery of) a commodity. The terms of a futures contract are standardized by type (corn, wheat, etc.), quantity, quality, and delivery time and place. The variable portion of the contract is the price, determined at the time of the trade in a process called price discovery that takes place on our trading floor.

What is an option on a futures contract?

An option on a futures contract gives the right (but does not impose an obligation) to buy or sell a futures contract at a certain price for a limited time. Only the seller of the option is obligated to perform. There are two types of options: calls and puts.

What are calls and puts?

A "call" is an option that gives the option buyer the right (without obligation) to purchase a futures contract at a certain price on or before the expiration date of the option for a price called the premium, determined in open outcry trading in pits on the trading floor. A "put" is an option the gives the option buyer the right (without obligation) to sell a futures contract at a certain price on or before the expiration date of the option.

What is hedging and speculating?

Hedging is the practice of using the futures market for price protection involving the offsetting of price-change risk in any cash market position by taking an equal, but opposite position in the futures market. For example, a farmer may use futures or options to establish the price for his crop long before he harvests it. Various factors affect the supply and demand for that crop, causing prices to rise and fall over the growing season. The farmer can watch the prices discovered in trading at the CBOT and, when they reflect the price he wants, will sell futures contracts to assure him of a fixed price for his crop.

Speculating is the practice of buying and selling futures contracts and options to make a profit. A speculator will buy and sell in anticipation of future price movements, but has no desire to actually own the physical commodity. Speculators, thus, assume market price risk and add liquidity and capital to the futures markets.

What is the difference between a long and short position in the market?

A short position involves selling futures contracts or purchase of a cash commodity without offsetting an offsetting futures transaction. (A cash commodity is an actual, physical commodity someone is buying or selling, such as corn or soybeans, also referred to as actuals.) A long position involves buying futures contracts or owning the cash commodity.

What kind of economic indicators do traders watch in the agricultural and the financial markets?

In any market, the forces of supply and demand directly influence price. Buyers want to acquire a product at the lowest possible price; sellers want to sell it at the highest price possible.

For agricultural commodities, the various factors causing prices to rise and fall include acreage, crop yield, Government Farm Policy & Programs, exports and the weather. Statistics generated from the U.S. Department of Agriculture in its monthly crop report provide valuable information to the grain trade.

CBOT financial instruments operate on the same premise. Suppliers of money, such as banks or thrifts, lend excess funds at a price--the interest rate.

The level of interest rates--the price of money or credit--is determined by supply and demand. Borrowers want to acquire at the lowest rate possible; lenders want to maximize their interest income.

Government policies, business conditions, Federal Reserve actions, and consumer saving and spending preferences are among the factors influencing supply and demand of loanable funds and, hence, the level of interest rates.

What is a "bull" market?

A bull market is a period of rising market prices.

What is a "bear" market?

A bear market is a period of declining market prices.

Will prices in the grocery store increase if agricultural prices at the CBOT rise?

Prices discovered in the markets at the CBOT will have an impact on the cost of doing business for the companies supplying the grocery store. Whether that will translate into a price change at the grocery store depends on the business decisions of the supplier and grocery store owner.

How much of what is traded actually gets delivered?

It is estimated that typically four percent or less of what is traded actually gets delivered. A contract may be bought and sold many times before the delivery date as businesses attempt to manage their risk. This is what accounts for the large volume traded, though relatively little is delivered, since the basic purpose of a futures contract is to provide price-change protection. (See hedging.)

Why are the trading areas called "pits"?

The trading floor over the course of the years has been modified to help buyers and sellers in the designated areas of trading see each other better. The current trading pits were set up as raised platforms with descending steps on the inside for improved sightlines. The resulting trading floor structures resembled "pits," hence the name.

Why are the pits shaped that way?

The octagonal pit shape actually makes the trading orderly. Each side of the octagon forms a "pie slice" in the pit. All the traders dealing with a certain delivery month (September for example) trade in the same slice.

Do people have assigned spots in the pits?

No, however, all the traders dealing with a certain delivery month (September, for example) trade in the same "pie slice"-shaped section of a pit. In addition, brokers, who work for institutions and/or the general public typically stand at the edges of the pit. From this position, they can easily see other traders and have easy access to their runners (who bring orders from phone booths) and an unobstructed view of the firm's trading booths, from which they may receive, flashed orders. The locals, who trade only for themselves, typically stand in the center of the pit.

Why do traders wear colored jackets?

Exchange rules dictate that personnel on the trading floor must wear jackets and ties, but business attire is not tailored to the physical demands of the trading pit. So the trading jacket was developed as a lightweight, loose-fitting alternative in which a trader may move more freely.

Some member brokerage firms have large floor staffs. In practice, all the staff from the same brokerage firm wears the same color jackets, which sometimes also bear the company name or logo, in much the same manner that sports teams wear uniforms. This helps the staff find each other on the crowded trading floor. The jackets also help for easy recognition during active trading.

Independent traders often wear trading jackets in colors of their own choosing or they sometimes wear the same color of jacket as that of the member firm that clears their trades.

Why do traders shout and use hand signals?

Trading is conducted through a public auction system. There is no central auctioneer; each trader plays that role for himself. Through open outcry, the trader shouts the quantity of the commodity he is buying or selling, and the corresponding price he wants. The hand signals are a specialized sign language, which clarifies the traders verbal, bids and offers, particularly when trading is highly active.

What do the hand signals mean?

A trader with his palm facing inward signals a wish to buy; one with his palm outward signals a wish to sell. Each finger held vertically indicates quantity. Fingers extended horizontally express the price at which the bid or offer is made.

What is a broker? A local?

A broker is a company or an individual who executes futures and options orders for financial and commercial institutions and/or the general public. A local is an individual who trades for himself.

Why does the Chicago Board of Trade offer trading via open auction and electronic platforms?

The Chicago Board of Trade offers both trading venues because we believe in providing the users of our markets with the best possible service. This gives our customers and members the most efficient and low-cost open auction and electronic outlets, and allows customers to decide where they want to place their business.

How is the customer's investment protected?

Protecting the interests of all participants in the futures market is the responsibility of all exchange and industry members, as well as federal regulators. Working in concert, they work to maintain an honest, open trading environment for all market participants.

Rules and regulations of the CBOT are extensive and are designed to support competitive, efficient, liquid markets. These rules and regulations are scrutinized continuously by the CBOT, and are periodically amended to reflect the needs of market users.

Making sure that these trading rules and regulations are observed is the responsibility of the CBOT's Office of Investigations and Audits (OIA). OIA staff members work to prevent trading irregularities and investigate possible violations of exchange rules and regulations. The activities of the OIA department include daily on-site surveillance of trading activity, continuous monitoring with state-of-the-art technology of member firms' risk exposure, and auditing member firms' financial conditions, as well as reviewing firms' trading and customer complaints.

How do I become a trader?

To trade on the floor of the CBOT a trader must be a member or hold a membership as a member firm.

Any individual, who is at least 21 years of age and is of good character, reputation, financial responsibility and credit and who satisfies the Membership Committee that he/she is suitable to assume the responsibilities and privileges of membership is eligible.

A prospective member must submit an application, signed by two sponsors who are members of the CBOT. The exchange conducts a thorough investigation of each applicant, focusing on his or her credit standing, financial responsibility, character and level of integrity. An applicant must also complete a "New Member Seminar." The seminar provides instruction in the basics of exchange rules and trading practices. A passing grade is mandatory upon completion of the seminar.

Individuals interested in becoming a member of the Chicago Board of Trade should contact Member Services at (312) 435-3480.

How can I buy a seat on the Chicago Board of Trade?

A membership is sold to an applicant through a "bid" and "ask" system administered by the exchange. Each applicant must meet certain financial and other requirements and be sponsored by two exchange members. The cost of a membership varies by category and current supply and demand factors.

The Chicago Board of Trade has 1,400 full members, who are eligible to trade any of the futures and options on futures offered, and about 700 associate members who are eligible to trade financial and other designated contracts. In addition, there are a number of membership interests, whose holders may trade contracts limited to certain markets; the membership interests are: the Index, Debt and Energy Market (IDEM), the Commodity Options Market (COM), and the Government Instrument Market (GIM).

Who runs the CBOT?

The governing body of the exchange consists of a Board of Directors that includes a Chairman, a Vice Chairman, 11 member directors, three public directors, and the President. An executive staff headed by the President and Chief Executive Officer administers the exchange.

What are the trading hours?

See our Trading Hours page