Organization of Trading in Financial Futures Markets

Financial futures contracts are traded in the United States on organized exchanges such as the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Futures Exchange, the Mid America Commodity Exchange, and the Kansas City Board of Trade. These exchanges are highly competitive with one another, and each organization tries to design contracts and set rules that will increase the amount of futures trading on its exchange.

The futures exchanges and all trades in financial futures in the United States are regulated by the Commodity Futures Trading Commission (CFTC), which was created in 1974 to take over the regulatory responsibilities for futures markets from the Department of Agriculture. The CFTC oversees futures trading and the futures exchanges to ensure that prices in the market are not being manipulated, and it also registers and audits the brokers, traders, and exchanges to prevent fraud and to ensure the financial soundness of the exchanges. In addition, the CFTC approves proposed futures contracts to make sure that they serve the public interest. The most widely traded financial futures contracts listed in the Wall Street Journal and the exchanges where they are traded (along with the number of contracts outstanding, called open interest, on

March 20, 2006) are listed in Table 1.

Given the globalization of other financial markets in recent years, it is not surprising that increased competition from abroad has been occurring in financial futures markets as well.

The Globalization of Financial Futures Markets

Because American futures exchanges were the first to develop financial futures, they dominated the trading of financial futures in the early 1980s. For example, in 1985, all of the top ten futures contracts were traded on exchanges in the United States. With the rapid growth of financial futures markets and the resulting high profits made by the American exchanges, foreign exchanges saw a profit opportunity and began to enter this business. By the 1990s, Eurodollar contracts traded on the London International

*Exchange abbreviations: CBT, Chicago Board of Trade; CME, Chicago Mercantile Exchange; LIFFE, London International Financial Futures Exchange.

Source: Wall Street Journal, March 21, 2006, p. C11; wsj.com/free.

Financial Futures Exchange, Japanese government bond contracts and Euroyen contracts traded on the Tokyo Stock Exchange, French government bond contracts traded on the Marché à Terme International de France, and Nikkei 225 contracts traded on the Osaka Securities Exchange all became among the most widely traded futures contracts in the world.

Foreign competition has also spurred knockoffs of the most popular financial futures contracts initially developed in the United States. These contracts traded on foreign exchanges are virtually identical to those traded in the United States and have the advantage that they can be traded when the American exchanges are closed. The movement to 24-hour-a-day trading in financial futures has been further stimulated by the development of the Globex electronic trading platform, which allows traders throughout the world to trade futures even when the exchanges are not officially open. Financial futures trading has thus become completely internationalized, and competition between U.S. and foreign exchanges is now intense.