The Chicago Mercantile Exchange: A History

Aristotle recorded one of the earliest instances of futures trading when he wrote of Thales and his olive presses over 2000 years ago. Since that time, futures trading has become an integral part of the global economy and a crucial aspect of our agricultural development. In the United States, what began in Chicago in the late 1800s has grown to global significance.

Now roughly 90% of all futures are handled by the CME group, whose headquarters are in Chicago. Many hedge funds use futures in their trading strategies. Futures are also used by many companies to hedge certain risks, allowing the firm to focus on their core competency and have more cost certainty.

The Chicago Mercantile Exchange (CME) had its start in butter. It was formed following a dispute over whether margarine could be sold as a substitute in Illinois, which caused the butter and egg dealers at the Chicago Produce Exchange to split off and form their own board. The resulting Chicago Butter and Egg board established grades and rules of trading, beginning in the early days when prices for kegs of butter were set by being individually smelled and tasted on the spot.

The Butter and Egg Board reorganized into the Chicago Mercantile Exchange in 1919, taking advantage of a time when major agricultural production in the US was seasonal and storage was primitive at best. The markets were disorganized and the dealers purchasing commodities experienced significant price risk as gluts and shortages of agricultural produce caused chaotic fluctuations in price. The exchanges established at the time were designed to limit that price risk.

Chicago: A Natural Hub and World-Class City

Located at the base of the Great Lakes, close to the cattle country and farmlands of the U.S. Midwest, Chicago is a natural center for trading, transportation, and distribution of agricultural commodities. Moreover, since the 1900s, Chicago has evolved into a city which is truly world class. Its central location makes travel to anywhere in North America convenient. Chicago is widely acknowledged as having the best architecture in North America, and is famous for its food (deep dish pizza and hamburgers).

Chicago is a great sports city, with the Chicago Blackhawks, an ice hockey team which led by Jonathan Toews, Duncan Keith, Patrick Kane, and Dustin Byfuglien, recently won the Stanley Cup to establish itself as the best hockey team on the planet; Chicago also has two baseball teams (Cubs and the Whitesox), a basketball team (Bulls, which led by Michael Jordan, won six Championships in the 1990s), and a football team (Bears).

The University of Chicago is regarded as one of the very best universities and is home to many Nobel Laureates in Economics. Finally, Chicago remains one of the major finance centers in the world; the financial activity and finance events is busy year-round, and perhaps more than any other city, Chicago has experience and expertise with both commodities and capital markets, and their intersection.

Growth through Innovation

In the past 100 years, the CME has achieved longevity thanks in part to its ability to adapt. As technological changes altered the production of butter and eggs following World War II, exchange members first updated how they traded those contracts, and then vigorously researched, tested, and promoted many new contracts for futures trading. In 1970, Everette Harris, then-President of the CME, described 20 years of testing new contracts as “Some have succeeded and some have failed, but fear of failure has not impeded progress.”

The spirit of innovation has led to a vast array of tradable futures on the CME. In 1964, the exchange began trading live cattle futures, in 1972 it issued the first futures on foreign currencies, and in 1982 stock index futures were added to its product list. In 1992 the first electronic futures trades were made on the CME Globex platform, and in 1999 the CME introduced exchange traded weather futures.

The CME group has continued to expand its offerings: May 23rd marked the launch of palm oil futures trading, the first dollar-denominated crude palm oil futures contract; June 20th will see the launch of cheese futures on the CME Globex platform.

From 2000 to 2008, the CME de-mutualized to become the first publicly traded exchange, and was followed quickly by the Chicago Board of Trade. The two merged to form CME Group Inc in 2007, and in 2008 acquired the New York Mercantile Exchange to house trading of 90% of all US futures.

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