What Happens When A Stock Is Added To The S&P Commodities and Futures Market – In And Out

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Commodities and Futures Market – In And Out

The futures and commodity markets were originally established in the United States in the late 1800s. The original purpose was to help smooth out the severe price swings that occurred when there was a shortage or surplus in the market. At that time, international commerce on the scale it has reached over the past two hundred years was unfathomable. Today, trillions of dollars of raw materials and finished products cross the globe at breakneck speed.

Although the United States was not the first to lead the world in the Industrial Revolution, it was a key architect in the development of international trade into the world we enjoy today. The influence of the United States has led to the creation of a financial model that is imitated around the world. Countries around the world, 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 possible. While these countries are important, they are only the tip of the iceberg of the number of countries working hard to build their emerging market economies.

In the wake of this strong global economic growth, the once modest US futures and commodity exchanges have taken on a new role. As raw materials from different countries must compete with each other, currency fluctuations and the economic reality of interdependent economic policies, futures, and commodity exchanges have emerged around the world. Commodity contracts such as soybeans, oil and gold, which were once dominated by US exchanges, the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME) and the New York Mercantile Exchange, now share space and time zones with newly formed exchanges in India, China and Dubai.

While US exchanges once held a virtual monopoly on the offering of commodity and futures exchange contracts, they now face fierce competition from various exchanges in other countries and the emergence of new players on their territory. As opposed to being leaders, they are now forced into a reactionary role. Once their contracts set the tone for volume and price discovery, many other similar contracts begin to gain prominence around the world and dictate price and market compliance.

At the heart of it all is the trader. The development of the 24-hour global trading market plays a significant role in determining the long-term success of each individual, whether retail or professional. A trader’s ability to adapt to information, both technical and fundamental, as well as his ability to serve different markets are becoming increasingly important. There isn’t much of a secret to trading in this new environment; it just becomes more important for you to be able to process the information while still being able to protect yourself from the actions that are happening halfway around the world while you sleep.

Here, we explore the recent merger between the CBOT and the CME and what it means for a trader’s day-to-day activities. We’ll also look at various new exchanges emerging in the United States and abroad. In addition, we look at the futures of the United States single share futures (SSF) and their international counterparts, contracts for difference (CFDs), and find out which one is more relevant.

Next, we will examine the impact, if any, that the over-the-counter (OTC) foreign exchange market has on the exchange-traded foreign exchange markets. We also discuss the revolutionary value of the Standard Portfolio Risk Analysis (SPAN) risk management system and the natural interaction of the spot, futures and options markets. We take a candid look at the difficulties of trading these different markets in real-time and through backtesting, both of which are critical to developing the tools you need to succeed.

Finally, we highlight 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 trade in different arenas and time zones and are globally affected by policies and regulations that do not originate in the United States.

Exchanges

In the spring of 1848, the first 83 traders of the Chicago Mercantile Exchange didn’t even know that they would change the world forever. From these humble beginnings, the derivatives asset class has grown. Nobel prizes were awarded to mathematicians who came 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 trade are now jumping on the bandwagon. All this activity has forced commodity exchanges to move from trading only agricultural products to trading a wide range 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 around the world who want to participate in markets they could not otherwise afford. The versatility of the commodity exchange model has taken it so far from its original roots that it has almost confused those familiar with agricultural commodities and stocks into believing that the products they are being presented with 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 were standardized contracts, which we know as futures contracts, and individual contracts, which we know as over-the-counter (OTC) contracts. While the liquidity of standardized contracts was always guaranteed by the exchanges themselves, the OTC market was considered almost illiquid due to its customization. With two counterparties agreeing to an agreement with very specific criteria, it was believed that it would be difficult to find anyone else willing to accept the same terms. OTC markets, realizing the dilemma, decided to take a page from the commodity exchange playbook and simply standardize the sizes and steps of their individual contracts. Thus, they added a huge amount of their activities. OTC foreign exchange trading is a prime example of this; it currently trades about $2 trillion daily between counterparties without a central pricing exchange.

The far-reaching implications of the commodity exchange model literally changed the world. Thanks in large part to the Commodity Futures Modernization Act of 2000 (CFMA), there are exchanges around the world that allow you to trade various future events, such as presidential elections, greenhouse gas emissions, and the weather. The Commodity Futures Modernization Act paved the way for OTC energy credit trading and electronic energy trading, as well as the development of single-stock futures. There are exchanges that have taken advantage of this simple expansion of power in surprising new ways. They have developed ways to minimize traders’ losses by styling their product offerings through so-called binary futures and binary options, along with the development of fully electronic trading markets.

No matter what the product is or how it is managed, the same elements always apply: contracts are involved, the product being traded is not a real product, and the product is primarily designed to manage invisible risks.

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