Market Matters Blog

How the CME Makes Money

Futures contracts are important tools for farmers in their marketing. I've met some who use them more than others, and yet others who have a gift for seeing option strategies. I've also met many farmers who would prefer to sign a contract with their local elevator, and the let the elevator shoulder the margin call.

Whatever your relationship with futures and options -- I understand that some in farm country are still upset about CME's decision to shift from a member-owned club to a for-profit company back in 2000 -- there's an article in the Financial Times that you need to read.

Part profile, part think piece, it leads the read in some interesting directions. Is this the way our futures market should be run? At present, the core issue surrounds trading in CME Group's interest rate futures and the relative importance of that as the Federal Reserve begins to raise interest rates.

It also discusses how CME's business model has helped consolidate 99.97% of U.S. interest rate futures and options volume on one exchange. It touches on the challenges of automated trading. It highlights the company's CEO, Terry Duffy, and the power of company's close relationship with politicians in Washington, D.C. And then, there's this gem:

"Mr. Duffy's blunt manner and deep understanding of Washington politics have helped CME emerge from the financial crisis as one of the most lucrative US businesses. As Wall Street banks scale back, the world's biggest exchange group racks up operating margins of 60 per cent. This ranks CME among the three most profitable members of the S&P 500 index, alongside Visa, the card network, and Gilead Sciences with its $1,000-a-day hepatitis pill."

Agriculture is a risky business, and CME's products are core tools farmers and agribusinesses use to manage those risks. Whether you personally trade on CME's futures or options products or not, it's worth understanding how CME grew into one of the nation's most powerful and profitable financial institutions outside of the agriculture space. The Fed thinks it's systemically important financial utility to the general economy. It's easily 10 times as important to farmers, county elevators and agribusiness.…



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