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Home , 4 World Trade Center, Commodity broker, Futures exchange

Loll] iii uiflhl UL Center, Inc. An Introduction to the Exchange Center Table of Contents Commodities Exchange Center ...... 3 FEATURE—What's All the Shouting About? ...... 5 FEATURE—The Economic Role of Futures and Options ... 7 Tracing a Futures Transaction at CEC ...... 8 CSCE, , & Cocoa Exchange, Inc ...... 10 COMEX, Exchange, Inc ...... 11 NYCE®, Exchange ...... 12 NYMEX, New York Mercantile Exchange ...... 13 FEATURE—Futures Trading: Should You Get Involved? ....14

ONYD In July 1977 four independent commodity exchanges opened a new trading floor in pices of a service company called Commodities Exchange Center, Inc. (CEC). CEC manages the 26,500 square foot trading floor. CEC is also responsible for the vast computer network which disseminates futures and options information, telecommunications, , administrative and office services for the four member exchanges. The member exchanges are: Coffee, Sugar and Cocoa Exchange, Inc., Commodity Exchange (COMEX), (NYCE), and New York Mercantile Exchange (NYMEX). CEC occupies over 130,000 square feet in 4 World Trade Center that includes not only the trading floor but the exchanges' administrative offices, associations, computer center and conference rooms.

Tour Program Each year thousands of people—school children, colleges, social organizations, trade related institutions, tourists—come to the CEC Visitors Gallery, located on the 9th floor of 4 World Trade Center, to view the excitement and activity on the trading floor. The Gallery is open to the general public Monday through Friday, 930 AM to 300 PM. CEC also invites you and your group to join our tour program which offers a presentation on the history of commodity trading, an informa- tive lecture explaining the activity conducted on the floor, followed by a question/answer period. Tours are conducted on a pre-arranged basis: 11.00 AM, 100 PM, and 200 PM,, Monday thru Friday.

Tours, which can be arranged for groups of 5-50, should be scheduled at least] week in advance of the date desired Please call 212-938-2025 for more information.

3 What's All the Shouting About? In observing the trading selling. The number of fingers floor, what may look like chaos he extends indicates the num- is actually a very orderly pro- ber of contracts he would like cess of futures and options to buy or sell. contract execution known as Orders get to the trading . Open outcry is a floor the same way orders to process common to all com- buy or sell securities get to a modity exchanges in the U.S. exchange. The difference at the CEC is Somewhere in the world a that four of those active customer gives an order to buy exchanges are conducting or sell to his broker who, in trading within a jointly shared turn, transmits it to a tele- facility. phone clerk on the CEC Floor. There's a very good reason The order ticket is then time- why everyone is shouting and stamped and relayed to a waving. They are required to member in the appropriate do so. A commodities trading ring, who will execute exchange is probably the best the trade if possible. example of a true auction mar- When a trade occurs, quan- ket, for all exchanges require tity,time, price and broker are that bids and offers be made by noted on a card and confirma- open outcry. When there are a tion is relayed back to the tele- hundred or more commodity phone clerk. The clerk then brokers shouting at each other reports it to the originating around a single trading loca- broker who informs his cus- tion, the din is so great it is tomer that the trade has been often difficult to hear individual completed. Meanwhile, an voices, so brokers have their exchange reporter enters the own sign language to be sure trade details into the CEC data everyone in the trading ring communications system. Any understands what's going on. price variations from the last When you see a broker with his trade made are flashed instan- hand turned palm toward him, taneously on the display he is buying. If the palm is boards that surround three turned away from him, he is sides of the trading floor.

4 I What's All the Shouting The Economic Role About? (continued) of Futures and Options Simultaneously, the new price A clearing association exists Futures and options are case of a drop in price, the is displayed on video screens, to facilitate the flow and trans- generally traded by two types farmer would offset the cash and sent out to the press and fer of funds resulting from its of traders: hedgers and spec- loss when he sells his to quotations systems through- member firms' transactions, ulators. The hedgers, who crop with a futures market out the world. The entire pro- and to serve as a guarantor of represent commercial inter- profit. Likewise, a manufac- cess, from initial order to contract performance. In other ests, use futures and options turer who needs to buy raw confirmation to price display, words, the brokerage firm, after markets to offset and manage materials in the future for pro- usually takes less than a few executing a trade, deals price risk. Speculators trade cessing can buy a futures con- minutes. exclusively with the clearing futures and options as an alter- tract to reduce the risk that Those trading data confirma- association which, in effect, native or additional investment raw material will tion cards are very important, acts as the seller to every vehicle to , bonds and increase before he makes his for when trading ends for the buyer and buyer to every seller. other financial instruments. cash market purchase. day they must be submitted to The clearing association Speculators seek to profit by the appropriate exchange membership is comprised of assuming the price risk that PRICE DISCOVERY clearing association. Custom- the larger brokerage houses hedgers wish to avoid. Spec- Futures and options markets ers' names need not appear on and trading firms acting jointly ulators add liquidity to the provide a competitive price the cards as buyers or sellers. to guarantee the contract obli- markets and help futures and setting mechanism for com- Only the name of the broker gations of each clearing options markets perform their modities and financial instru- and the clearing association member. two major economic functions: ments. Futures and options member, in whose name the Behind all the trading floor (1) risk shifting and (2) price markets absorb information, trade was made, must be on activity is an army of pro- discovery. allowing prices to be efficiently the card. ducers, processors, manufac- derived, thereby assuring that Not all exchange members turers, importers, exporters, RISK SHIFTING both buyer and seller receive have clearing association bankers, researchers, institu- Commercial interests, or the best prevailing price at any tional investors, brokers, econ- membership, but every trade hedgers, use commodity mar- point in time. Therefore, prop- must be verified and guaran- omists, governments, and kets to shift—or more prop- erly functioning futures and teed by the clearing associa- individual speculators. All have erly manage—the price risk to options markets increase the tion members. Consequently, their own particular economic which they are exposed in competitiveness of cash mar- every floor is required purpose for being involved in their commercial dealings. kets by maximizing the infor- to clear his transactions with a the day-to-day price move- Hedging involves taking an mation flows of one central ments of the vital commodities clearing member or is himself equal but opposite futures market where the forces of a member of one or more of that are being bought/sold on position to one's cash position. supply and demand determine the clearing associations at the the floor of the Commodities For example, a seller of a com- price. CEC. Exchange Center. modity, such as a farmer, can And that's what all the shout- reduce the risk of falling prices ing is about. by selling a . In Orders are executed by open 3 outcry between floor brokers Tracing standing in the trading rings. Open outcry trading involves continued voicing of bids to buy and offers to Futures and sell between brokers who also use hand signals to assist communica- Options tions between one another. Transactions at CEC An exchange is a member- ship organization which pro- vides the physical facilities Exchange reporters, stationed used for futures and options 4 among the floor brokers in trading within established each ring, are responsible for rules and regulations that are transmitting the prices of all Your commodity broker trans- trades (using hand signals) to a designed to provide standard 'mits your order to the CEC trad- clerk stationed in a rostrum over- and equitable treatment for all ing floor via telephone or teletype. looking each ring. The data is then participants in the market. immediately entered into the cen- All domestic commodity tral CEC computer. exchanges are regulated by the Federal Government through the Commodity Futures Trading Commission (CFTC). Computer-actuated wallboards 5 instantly display transaction prices to all trading floor brokers and telephone clerks. All trading data is immediately available to you or your broker via private price quotation vendors who provide CEC data through Incoming orders are recorded video terminals or personal 2 on trading slips which are computers. immediately passed to a floor bro- National and international news ker standing at the appropriate wire services further distribute trading ring. CEC trading data, which is pub- lished daily by major trade and financial publications. Coffee, Sugar & Cocoa Exchange, Inc. Commodity Exchange, Inc. Today, the Coffee, Sugar & In 1982 the CSCE was the Commodity Exchange, Inc. has been completely auto- Cocoa Exchange, Inc. (CSCE) is first U.S. futures exchange to (COMEX), founded on July 5, mated and responsibility for the world's leading market- originate trading in options 1933, is a product of a merger trade submission has been place for futures and options on futures contracts with the of four older exchanges, the shifted to clearing members. In trading in these international introduction of options on National Metal Exchange, the addition, COMEX announced commodities. In existence world sugar futures. This Rubber Exchange of New York, plans for an interactive hand- since 1882, the CSCE has pro- market has subsequently the National Raw Exchange held transaction entry system vided a marketplace where the grown to become the and the New York to accurately record trades in worldwide forces of supply and Exchange's second most Exchange. COMEX has been an our markets. The system will demand determine the prices active contract. important part of the overall be feasibility tested in 1990. of three globally significant In March of 1986, the CSCE growth of futures trading for During testing the hand-held agricultural commodities. launched an options contract more than 50 years. device will be modified to meet On March 7, 1882, the CSCE on its cocoa futures, and in the COMEX is the world's most the day-to-day needs of was founded as the Coffee fall of the same year, opened active metals market and is COMEX traders. When fully Exchange of the of New the coffee options market. among the largest commodity implemented it will bring the York by a group of young coffee In 1987 the Exchange futures exchanges in the speed, accuracy and audit trail merchants reacting to a crisis instituted the World White world. As the dominant enhancements of an auto- in their trade. In the wake of Sugar contract which requires exchange for futures and mated system to the liquidity uncontrolled and the delivery of refined sugar. options trading, COMEX is a of open outcry trading. tremendous oversupply that In 1989 the CSCE expanded major force in the world gold COMEX will continue to pro- led to the collapse of the its presence in the world's market. In addition to its prom- vide an open and freely-com- market in 1880, they sought to markets by offering a futures inence in international gold petitive marketplace for the rebuild the coffee trade by contract based on a new Inter- trading, COMEX is the domi- trading of futures and options establishing the first orderly national Market Index'M (IMP) nant world market for contracts, tailoring its markets market for trading of coffee thus continuing its 107 year and futures and to meet the needs of the indus- futures. tradition in the international options and is the only U.S. try and develop in conjunction The Exchange added the marketplace. exchange to offer trading in with changes in prevailing reg- trading of sugar futures in 1914, Detailed brochures about aluminum futures. ulatory,economic and financial and subsequently changed its each of the Exchange's con- In its continuing effort to conditions. name to the New York Coffee & tracts are available, free of meet the ever-changing needs Sugar Exchange, Inc. in 1916. A charge, upon request. of the industry, COMEX few years later, in October of recently changed its copper 1925, the New York Cocoa futures and options and alumi- Exchange was founded, estab- num futures contracts to lishing the world's first market- high-grade (minimum purity place for cocoa futures trading. standards) metals. The In September of 1979, the Cof- Exchange also upgraded its fee & Sugar Exchange, Inc. and trade matching and processing the New York Cocoa Exchange system. The previously used merged, forming the Coffee, manual procedure for submit- Sugar & Cocoa Exchange, Inc. ting trade data to the Exchange NYMEX New York Cotton Exchange In New York Mercantile Exchange Founded in 1870 by a group innovative futures and options A little more than a decade As the next century rapidly of cotton brokers and mer- contracts are traded on FINEX® since the launch of its heating approaches, NYMEX is poised chants, the New York Cotton including U.S. Dollar IndexsM oil futures contract in 1978, to meet tomorrow's risk man- Exchange (NYCE®) is the oldest (USDX®) futures and options, New York Mercantile Exchange agement challenges. By devel- commodity exchange in New Five Year U.S. Treasury note (NYMEX) has become the oping new and innovative York. The Exchange consists of (FYTR) futures and options, world's leading risk manage- products and seeking the tech- 450 members which represent Two Year U.S. Treasury note ment forum for the energy nology to export its liquidity to either commercial users, com- (2YTN®) futures and European industry. In the process, it has every corner of the globe, the mission houses or themselves. Unit (ECU) futures. also become the third largest New York Mercantile Exchange Since its founding, the Several of these financial con- futures exchange in the U.S.. will maintain and enhance its Exchange has been an integral tracts have proved to be The NYMEX energy complex status as a worldwide futures part of the cotton industry and among the most successful is comprised of , industry leader. today is the world's premier new contracts to be intro- gasoline (1981), crude oil marketplace for cotton futures duced in recent years. (1983), propane (1987), residual and options trading. The In 1988, the New York fuel oil (1989) and Exchange has also introduced Futures Exchange (NYFE), a futures contracts, along with several new innovative prod- subsidiary of the New York options on crude (1986), heat- ucts and will continue to , became an ing oil (1987) and gasoline respond to the increasingly affiliate of the NYCE® and (1989). Trading volume contin- sophisticated demands of a moved its trading operations to ues to climb, and the crude oil global financial marketplace. the NYCE® quadrant. NYFE's contract is the world's most In 1966, the Exchange built financial products include actively traded futures con- on its agricultural expertise futures and options on the tract on a physical commodity. and expanded its product line NYSE Composite Stock Index NYMEX's success has not through the formation of the as well as the CRB Futures been limited to energy. The Citrus Associates of the New Price Index. Exchange's hi-tech metals con- York Cotton Exchange, Inc., an tracts— and pal- affiliate of the Exchange, where ladium—continue to attract frozen concentrated orange broad trader interest. Growing juice futures and options are investor participation, new traded. industrial applications and a In 1985, the Exchange dynamic marketplace have entered the explosive arena of made NYMEX platinum and financial futures and options futures key financial through the creation of the instruments for hedgers and Exchange traders alike. (FINEX®) division. Several

12 13 Futures and Options liading: Should You Get Involved? The late Will Rogers offered per- often misunderstood. Speculator is buying and selling. He may also be There are a number of ways to haps the best advice to people who not a bad word. It is derived from the using spreads and arbitrage, and he's place orders, market orders, limit wanted to invest in the stock mar- Latin speculari: to watch and observe. concerned with the tax aspects of his orders, stop orders, spread orders, ket. The famous cowboy/comedian Wise speculators do just that. They trading. The broker you choose combination orders and more. A said: "Buy low and sell high, and if it watch price movements, observe sup- should be familiar with these market knowledgeable broker will provide don't go up... don't buy it:' ply and demand, monitor commercial techniques. specific educational materials and will His seemingly foolproof advice activity in the market, evaluate the Placing an order to buy or sell a assist your investigation into all doesn't necessarily apply to com- factors affecting price, and then make commodity contract is critical to suc- aspects of futures trading. modity futures markets. In com- their buy or sell decisions using "risk cess. The speculator must become modities, it's just as important to capital"—money that they can afford familiar with the different types of How can one learn more sell high and buy low, because even to lose. In effect, speculators do every- orders and the way instructions about commodity "if it don't go up you may still be in thing possible to minimize risk and should be given to his broker to speculating? a position to make a profit on a maximize profits, without endanger- assure prompt execution. Many books have been written on that market decline. It's as easy to sell a ing their financial base. subject, and most commodity broker- futures Contract as it is to buy one, Time and price are the two age firms and commodity exchanges and profit is possible either way. Where does one start? key elements of every order. will supply you with informative Unlike stocks or bonds, you can- Launch your own investigation by Unless otherwise specified, an order literature. Seminars and other educa- not buy a commodity futures con- contacting and questioning experi- will remain in effect only on the day tional programs for prospective spec- tract and put it away for years, or enced futures brokers. Select a bro- placed. However, an "open order" can ulators are popular. will it to your heirs. Every futures kerage house on the basis of its depth be placed and will remain in effect Obviously, no one can guarantee and options contract has a rela- in futures trading services. It should until it is executed or cancelled (also success in futures or options markets, tively life span, and if not have good communications facilities, termed "good 'til cancelled" orders). anymore than success can be assured offset with an opposite transaction, not only with its customers but with You can specify executions "on-the- in the , real estate, oil or expiration in the case of an its floor brokers at the exchange. The opening" or "on-the-closing" of the exploration or any other risk-oriented , ends with ultimate delivery firm should also have research ability market or designate a specific time for investment activity. to keep abreast of factors affecting or acceptance of delivery of the an order to be executed. If anyone is interested in com- market fluctuations as well as training commodity, financial instrument, or Price is the other element of strat- modity speculating, the first question programs for its account executives cash equivalent. The objective, egy. Orders to buy or sell "at the to ask is "can I afford to speculate in who are in contact with the customer. from a speculator's standpoint, is to market" are executed at the best pos- commodity futures or anything else?' get into the market at the right Once you have decided on a firm, sible price when the order is received Put simply, speculate only with risk time, at the right price, and get out evaluate your account executive as on the exchange floor. But a trader capital money not necessary to main- of the market at a better time and well. He should be knowledgeable may designate a specific price for the tain your established lifestyle. If you price before the contract's maturity about the markets in which you are order and run the risk of not having it have adequate insurance, sufficient or delivery date. The life of a most interested. Not many keep filled if the market never reaches that savings for emergencies, and a port- futures contract is generally less abreast of every futures market every point while assuring himself of a bet- folio of sound stocks or bonds, you than 24 months, and you have a day, but a good broker knows where ter price (than prevails at the time the may have a good financial foundation. choice of several contract months near to get information his customers need order is placed) if it is filled. If your fundamental financial obliga- and distant from which to choose. and is able to intelligently discuss tions are met, you could consider Individual market participants are your position in the market. The futures and options trading. called speculators—a term that is sophisticated speculator isn't merely

14 15 Be certain that you aren't under- Conversely, the market may move capitalized. Commodities markets against them during the same period, often change rapidly and one of the but a prudent speculator will have prerequisites for success is the ability placed a "stop loss" order with his to take losses. Many of the most suc- broker in order to liquidate his posi- cessful commodity traders have low tion when the price of the commodity batting averages when comparing drops to his established stop point. winning and losing trades, but score This strategy may minimize losses on the home run. They are accus- and preserve remaining risk'capital tomed to acting quickly, cutting losses for use in other trades. Speculators to a minimum while letting favorable who do not liquidate positions as the trades run as as possible for market moves against them can maximum profit. Thus, while a suc- expect to receive a " call" from cessful futures trader may have more their broker to cover the potential losing than winning trades, the size of loss. Also, a trader may request the his profitable trades more than offsets return of surplus margin funds that his losses. build up in his account when the Market price fluctuations determine market is moving in his favor. profits or losses. However, the tremen- There are no magic formulas. dous leverage available to futures Speculators will take losses, but the traders has the greatest impact on the smart trader can still profit greatly. capital invested. Initial margin requirements vary from broker to broker but average about 10% of the full of a contract. This relatively small capital outlay makes small price changes into dramatic profits or losses. Speculators, as a rule, avoid having to make or take delivery of the phys- ical commodity by liquidating their contract position prior to its maturity month.

16 COMMODITIES EXCHANGE CENTER, INC. Four World Trade Center New York, NY 10048 (212) 938-2000 100M690