Wrong Place, Right Market Futures Exchanges

Don Dawson

One of the advantages to trading futures is there are central futures exchanges to trade on.  Having a central Exchange allows for transparency in price for all to see, a central gathering place to execute orders via electronic or open outcry trading and, most helpful, direct access to the venue to execute your trade.

However, if a trader is not aware that some futures products are traded on multiple exchanges, then they may route their order to the wrong exchange.  The word “wrong” is simply saying that the exchange your order ends up on may be the one with the least amount of liquidity.

Free Trading WorkshopBefore a trade is placed on any platform the trader is personally responsible for understanding the product’s contract specifications.  If this is a first time trading a particular product the trader should contact their brokerage firm and ask “Does this product trade on multiple exchanges?”  Don’t be ashamed to call and ask this question.  Remember, you are the customer and the broker is there to serve you, not the other way around.  Not calling could possibly cost you unnecessary losses.

Here are a couple of futures products that trade on multiple futures exchanges:

  • WTI Crude Oil (West Texas Intermediate)
  • Sugar
  • Coffee
  • Cocoa

Here in the United States we have two futures exchanges, the Chicago Mercantile Exchange Group (CME) and the Inter-Continental Exchange (ICE).  The above listed products trade on both of these Exchanges, but only one has the trading volume to support good liquidity for each of these products.

First a little history of the exchanges.  The New York Board of Trade (NYBOT), where Soft Commodities traded (Sugar, Coffee, Orange Juice, etc), was located in the World Trade Center.  NYBOT was the largest volume exchange for these Soft products.  After 9/11/01 the Exchange was moved to temporary housing.  Soon after that ICE acquired all of the trading products on the NYBOT, therefore giving ICE the largest volume contracts for Soft products.  The New York Mercantile Exchange (NYMEX) is another exchange located in New York, but they are primarily known for trading Energy products.

The CME acquired all of the futures exchanges in the United States making it the largest futures exchange in the world.  During these acquisitions they obtained the NYMEX where the majority of its trading volume is done in the Energy sector.  NYMEX also has some Soft products as well, but they have very little volume and should not be traded by speculators.

A trader wishing to trade some of the Softs listed previously should be trading the ones on the ICE Exchange.  Here the volume is sufficient to allow a trader to get good trade executions when placing orders.

The contracts for these products vary slightly from the two different exchanges.  Like Cocoa on the NYMEX is cash settled, and on the ICE it is physically settled.  These are just little changes, but could still make a difference if a trader was unaware of the contract specification.

For an order to go to a specific exchange to be executed it has to have the proper symbol.  Here are the symbols for some of the Softs and Energy products on their respective Exchanges:

ICE Exchange CME Exchange
Cocoa (CC) Cocoa (CCP)
Coffee (KC) Coffee (KT)
Sugar (SB) Sugar (YO)
Crude Oil (T) Crude Oil (CL)

Another product that trades on both Exchanges is the Crude Oil market.  The CME who owns NYMEX is where a trader would want to trade Crude Oil (CL).  Here a trader can find a very long standing contract that trades about 600K contracts per day.  ICE recently started its own contract for Crude Oil (T) and has specifications very similar to the CL that trades on the CME.  One difference is the ICE Crude Oil is cash settled where CME is physically settled.  The ICE Crude Oil has very little volume and therefore should be avoided by speculators to eliminate bad fills on their trades.

Speculators who do use the ICE Crude Oil are usually trading an Inter-Commodity spread (simultaneously short and long related products); the ICE Crude Oil and the ICE Brent Crude Oil (European benchmark oil).  This is a popular energy spread used by Commercials and speculators alike.  Prior to the ICE creating their own Crude Oil contract the spreaders had to use the CME Crude Oil and the ICE Brent Crude Oil contracts to trade these spreads.  This created some back office nightmares and extra expenses of having to trade two different products listed on two different Exchanges.

Before you place that trade on a product you are unfamiliar with look up the contract specifications first then contact your broker immediately to ask which Exchange you should trade the product on.

“The secret of life, though, is to fall seven times and to get up eight times.” Paulo Coelo

Don Dawson

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.