The CBOT vs. the CME: What's the Difference?
Both the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) trace their roots to 19th-century Chicago, where each began as a nonprofit market for agricultural transactions. While the two shared many historical developments, they emphasized different investments and operated in different fashions until their merger into CME Group, which also includes NYMEX and COMEX as part of its four designated contracts markets.
The merger between the two exchanges occurred in 2006 in a move approved by shareholders of both organizations. Up until that merger, they employed substantially different rules, regulations, market offerings, and trading engines.
Key Takeaways
- The Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) are both futures exchanges that were founded in19th-Century Chicago.
- The two focused on different types of investments and operated under different formats until they merged in 2006, becomingCME Group.
- The CBOT was traditionally an agricultural futures market, before adding financial futures in the 1970s.
- Today, the CBOT also offerstrading in precious metals, government debt, and energy stocks.
- The CME was originally known as the Chicago Butter and Egg Board, launching its first futures contracts in the early 1960s with frozen pork bellies.
- Today, the CME offers trading in forex futures, currencies, stock indexes, interest rate futures, and agricultural products.
The Chicago Board of Trade (CBOT)
The Chicago Board of Trade is the oldest operating futures and options exchange in the world. Established in 1848 as a trading floor for grain merchants in Chicago, by 1859, the CBOT was granted a charter from the state legislature in Illinois and grew into a prominent agricultural futures market.
In fact, the concept of exchanging forward contracts in a "futures market" may have originated at the CBOT in the 1860s. This investment hub also helped to popularize "open outcry" trading floors; traders met in the octagon-shaped "pits" to literally shout (or gesture) to make offers on stocks or futures contracts in a public setting, helping set markets on the exchange. Open outcry trading was replaced at the CBOT in 1994 by an electronic system of placing orders.
After more than 125 years of trading exclusively in agricultural products, financial contracts were added to the Chicago Board of Trade in 1975. Financial futures contracts followed in 1982, and then futures-options contracts in 1997. The CBOT is a popular exchange for trading on a variety of instruments, including precious metals, government securities, and energy stocks.
The CBOT was reorganized in 2005 and held an initial public offering on the New York Stock Exchange as the Chicago Board of Trust Holdings Inc.
The CME is larger than the CBOT. It is the largest futures and options exchange in the United States and the second-largest in the world. Worldwide, the National Stock Exchange of India in Mumbai is larger than the CME in terms of trading volume.
The Chicago Mercantile Exchange (CME)
The Chicago Mercantile Exchange was founded in 1898 as the "Chicago Butter and Egg Board" before changing its name in 1919. It is the third-largest derivatives exchange in the world and the largest in the United States. The exchange is perhaps most notable for being the first financial exchange to "demutualize" and become a publicly traded, shareholder-owned corporation in the year 2000.
The CME launched its first futures contracts in 1961 on frozen pork bellies. More significant contract launches include financial futures and currency contracts in 1969 and the first interest rate futures contracts in 1972.
The CME is now a Designated Self-Regulatory Organization or DSRO, and it holds regulatory/audit authority over its many subsidiary organizations. Popular investments traded at the CME include forex futures, currencies, stock indexes, interest rate futures, and agricultural products.
The Chicago Mercantile Exchange, sometimes referred to as the Merc, has both public outcry trading floors and an electronic trading platform called GLOBEX, where more than 70% of its transactions take place.
What are the Similarities between CBOT and CME?
The Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) share some similarities. Both exchanges are located in Chicago, Illinois. Also, both exchanges have similar trading hours, which typically run from Sunday evening to Friday afternoon, with a break for the weekend. Additionally, the CBOT and CME trade a variety of futures and options products, including commodities, energy products and metals.
Furthermore, both exchanges moved from the traditional open outcry trading to electronic trading platforms. Also, both exchanges are regulated by the Commodity Futures Trading Commission (CFTC). Finally, both the CBOT and CME are also members of the Intercontinental Exchange (ICE).
What Type of Securities Trade on the CBOT and the CME?
The Chicago Board of Trade (CBOT) trade agricultural commodities such as corn, wheat soybeans and oats. Also, interest rate securities and derivatives such as treasury bonds, treasury notes, and Eurodollar futures are traded. Moreover, precious and industrial metals as well as energy products such as crude oil, natural gas and ethanol are traded.
On the Chicago Mercantile Exchange (CME) equity products such as the S&P 500, Nasdaq and Dow Jones futures are traded. Also foreign exchange products such as the Euro FX, Japanese Yen and British Pound futures are available to buy and sell. Moreover interest rate products such as Eurodollar futures and interest rate swaps as well as energy products such as crude oil, natural gas, gasoline and heating oil are traded on the CME.
How Do the CBOT and CME Operate?
To trade on the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME), you must be a member of the exchange. There are margin requirements to trade on the CBOT and CME and you are required to deposit a margin with the respective exchange.
Trades are performed electronically on the CBOT and CME. Both the CBOT and CME are clearinghouses as well. Settlement is conducted at the respective exchange.
What are the Limitations of the CBOT and CME?
While the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME) offer a wide range of futures and options contracts, there are still markets and asset classes that are not represented nor available for trading. Also, membership access is required, making it difficult for individual investors to participate directly in the markets. While counterparty risk is mitigated by trading on exchanges such as the CBOT and CME, it still exists.
The Bottom Line
The Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) are both futures exchanges located in Chicago, Illinois. While they share many similarities, there are some key differences between them. The CBOT focuses more on agricultural commodities and interest rate products, while the CME has a larger presence in equity index products and foreign exchange.
Additionally, the exchanges may have different trading mechanisms, membership requirements, and regulatory oversight. Overall, traders may choose one exchange over the other based on their specific trading needs and preferences.
