The Chicago Board of Trade

The Chicago Board of Trade (CBOT) has been a major player in the futures and derivatives markets for over 165 years. As one of the world’s oldest futures and options exchanges, CBOT has had an enormous influence on commodities trading and the global economy. This article explores the origins, evolution, and key events that have shaped CBOT into the global leader it is today.

The Early Days of CBOT

CBOT was founded in 1848, primarily to provide a centralized location where buyers and sellers could trade forward contracts on grains. At the time, Chicago was a growing frontier town ideally positioned in the heart of the midwest to become a major hub for the transportation and trading of agricultural commodities.

The exchange was formally organized and incorporated in 1859. One of CBOT’s major innovations was the creation of standardized contracts for the future delivery of commodities. This allowed traders to secure prices for commodities like wheat, corn, and oats well in advance of when they would be ready for market. It brought more stability and predictability to commodity producers, traders, and end-users.

Trading Moves Indoors

In 1865, CBOT constructued its own building and established a physical trading floor. This allowed year-round trading indoors for the first time. No longer subject to the elements, volume on the exchange grew substantially. The iconic art deco CBOT building that still stands today in Chicago was built in 1930.

With its trading floor known as ‘the pit’, open outcry trading dominated at CBOT for over 100 years. It was an energetic, noisy, chaotic marketplace. Traders in brightly colored jackets shouted and used complex hand signals to buy and sell futures contracts on commodities like corn, soybeans, pork bellies, and cattle. This fast-paced trading environment even inspired the climatic trading scenes depicted in popular movies like Ferris Bueller’s Day Off.

Pioneering Financial Futures and Options

In the 1970s and 80s, CBOT built on its agriculture futures dominance by introducing novel financial products. In 1972, it launched the first interest rate futures contract. This allowed banks, corporations, and institutional investors to hedge against risks associated with fluctuating interest rates.

The 1970s also saw volatility in commodity prices surge due to inflation, the 1973 oil crisis, and other global events. In response, CBOT launched the first options on futures contracts in 1975. Options on commodities gave traders flexibility to buy or sell specific futures contracts at specified prices, limiting risk.

CBOT later pioneered trading of futures and options based on various stock indexes, foreign currencies, and other financial instruments. This vastly expanded the exchange’s scope beyond just physical commodities.

Electronic Trading and the Rise of Globex

While open outcry trading remained the norm through the 1900s, technology was about to disrupt traditional trading floors. In the 1980s, CBOT formed a partnership to develop an electronic trading platform called Globex. It took years to gain traction, but Globex finally went live in 1992 and began to modernize derivatives trading worldwide.

The transition from floor trading to electronic trading picked up steam in the 2000s and early 2010s. With the benefits of greater speed, efficiency, and accessibility, global traders rapidly adapted to electronic platforms over old-fashioned open outcry bidding. In 2007, CBOT officially shut down most open outcry trading.

While it signaled the end of an era, the closure of physical trading pits paved the way for CBOT to enter a new phase as a cutting-edge, globally connected electronic exchange.

A New Home at CME Group

In 2007, CBOT agreed to a merger deal with the Chicago Mercantile Exchange (CME), its longtime rival based just down the street. The two exchanges had competed for futures and options trading volume for decades. But by joining forces under the CME Group name, they could better compete on a global scale with other major players.

After the merger, CBOT maintained its identity as a separate designated contract market with its own memberships and clearing services. But many back office functions were consolidated, and CBOT relocated to share trading space in CME Group’s new global headquarters.

This boosted efficiencies and gave CBOT traders access to CME Group’s full suite of products including interest rates, equities, foreign exchange, and more. However, CBOT continues to handle most trading of agriculture, real estate, and weather-related futures and options.

Key Products Traded at CBOT Today

Now part of CME Group, CBOT offers hundreds of derivatives products across 3 major asset classes:

Agricultural Commodities

• Corn – The most actively traded grain futures contract in the world. Used globally as animal feed and as an ingredient in foods, corn has many end-users eager to hedge price risk.
• Soybeans – From soybean oil to animal feed to biodiesel, soybeans are another widely consumed commodity with highly liquid CBOT futures.
• Wheat – Bread, pasta, cereal – wheat is a staple food globally and an essential crop for CBOT futures trading.
• Rice – While not as large as corn, wheat, or soybean markets, CBOT offers rice futures and options.
• Oats – Once more important when oats were fed to transport horses, this grain still trades actively on CBOT.
• Pork – Bellies, ribs, ham – CBOT handles futures trading for the whole hog.
• Cattle – Lean cattle futures track live cattle prices, while feeder cattle futures follow an index of young calves destined for feedlots.
• Dairy – CBOT offers futures and options tracking the butter and milk markets.

Financials

• Interest rates – CBOT offers futures and options tracking key short-term interbank lending rates like One-Month LIBOR as well as futures on longer-term instruments like 5 & 10 Year T-Notes and 30-Year T-Bonds.
• Stock market volatility – Using the CBOE Volatility Index (VIX) as a benchmark, CBOT trades derivatives tracking expected volatility in the S&P 500 and other stock indexes.
• Housing futures – The Case-Shiller Home Price Index futures can be used by banks, real estate investors, and others to hedge risks in the housing market.

Weather

• Hurricanes – CBOT offers futures and options contracts tracking hurricane activity in the Atlantic Basin. Insurers and reinsurers are major users.
• Snowfall – Snowfall futures and options at various cities across the US allow ski resorts and other winter-dependent businesses to lock in favorable snow conditions.
• Temperatures – Hedging against extreme temperatures that hurt profitability is possible with CBOT futures based on cooling and heating degree days.

Recent History and Impact

CBOT has faced periods of intense volatility, uncertainty, and economic turmoil over the past couple decades. After the dot com crash, CBOT weathered turbulence from 9/11 and the Iraq War. It successfully managed the 2008 financial crisis and Great Recession. Most recently, CBOT adjusted operations during COVID-19 shutdowns and restrictions.

Throughout it all, CBOT has remained an essential mechanism for price discovery and risk transfer. It has led expansion of derivatives into new asset classes, while retaining its roots in agriculture. And for over 170 years, CBOT has connected buyers and sellers to efficiently trade trillions in futures and options contracts.

Today, CBOT continues evolving. It is investing heavily in technology to improve speed, capacity, and security on its digital platforms. Strategic partnerships are giving CBOT global reach into new markets. And decisiveness during crises has protected CBOT’s reputation as a stalwart of derivatives trading.

The long and storied history of the Chicago Board of Trade reveals the integral role of futures exchanges in the growth of Chicago, American capitalism, and the modern globalized economy. For commodity producers, corporations, institutional investors, day traders, arbitrageurs, speculators, and many more, CBOT provides the invaluable ability to hedge risks and capitalize on opportunities.

Conclusion

From its inception as a small commodities exchange in the American frontier, CBOT has grown into one of the world’s most reputable futures trading institutions. Its culture of innovation has made CBOT a trailblazer – launching standardized futures contracts, options, financial derivatives, and electronic trading platforms that transformed markets worldwide.

Today, CBOT remains an essential forum for price discovery and risk mitigation. It offers traders globally the tools to execute complex hedging, speculation, and arbitrage strategies efficiently across a huge range of derivatives products. With astute leadership, cutting-edge technology, and a strong heritage, CBOT is poised for success into the future.