Chicago Board Of Trade

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Definition: Chicago Board Of Trade


Quick Summary of Chicago Board Of Trade


The Chicago Board of Trade (CBOT) is a commodities exchange located in Chicago, IL, and one of the busiest institutions of its kind in the world. Thousands of members trade futures and options on the Chicago Board of Trade (e.g. U.S. Treasuries, grains, livestock, precious metals, etc.). In 1848, a group of local business leaders founded the Chicago Board of Trade in an attempt to smooth out the boom and bust cycle of grain prices. Through the 19th century, the Chicago Board of Trade grew in importance to the city’s and region’s economy. However, throughout its growth, the Chicago Board of Trade also had difficulty preventing market manipulation, particularly by traders who tried to “corner” the market in various commodities. The Grain Futures Act of 1922 and the Commodity Exchange Act in 1936 imposed regulations on the Chicago Board of Trade aimed at curtailing these activities. Trading of financial instruments on the Chicago Board of Trade began in the 1970s. In 1973 the Chicago Board of Trade established the Chicago Board Options Exchange (CBOE), a sister entity. By the 1990s, the Chicago Board of Trade was facing increased competition from more efficient electronic exchanges. This prompted the Chicago Board of Trade to initiate efforts toward implementing electronic trading in 2001. In 2006 the Chicago Mercantile Exchange announced plans to buy out the Chicago Board of Trade, and in 2007 the exchanges merged to form CME Group.



Full Definition of Chicago Board Of Trade


Founded in 1848, the Chicago Board of Trade (CBOT) is the oldest futures and options exchange in the world. Futures and options contracts traded by more than 3600 CBOT members numbered over 454 million in 2003, which was a record in its own right. CBOT offers 50 futures and options contracts through a hybrid trading system that includes the traditional open outcry and electronic trading. The Chicago Board of Trade merged with the Chicago Mercantile Exchange (CME) on 12th July 2007 to create the CME Group Inc (NASDAQ: CME) that owns and operates three other exchanges in Chicago and New York, namely, NYMEX, COMEX and CME.

Early History

Merchants are always concerned that there should always be buyers and sellers in commodities markets. This concern led to the creation of forwards contracts. However, unless there is a centralized agency to monitor such contracts there is always a risk associated with a forward contract. CBOT was created to address this issue by providing a centralized agency where buyers and sellers would meet and negotiate trades.

Although established in 1848, it was only in 1864 that CBOT could come up with exchange-traded standardized forward contracts that came to be called futures. In 1919, the Chicago Butter and Egg Board, founded in 1898 and actually a spin-off entity of CBOT, was recognized as a futures exchange. Initially, it offered contracts only in butter and eggs but later expanded its portfolio and changed its name to Chicago Mercantile Exchange (CME).

After speculation for many years, CBOT and CME eventually merged to form the CME Group.

Chicago Board Of Trade Building

In 1930, CBOT moved to its present location, 141 West Jackson Boulevard, Chicago. Built in 1930, the CBOT building is a skyscraper that was designated as a Chicago Landmark in 1977. The building was later listed as National Historic Landmark in 1978. Designed by Holabird & Root it stands tall at 605 ft (184 m). It was the tallest building in Chicago but lost that distinction with the coming up of the Richard J. Daley Center in 1965. Marked by stylized forms and geometric designs distinctive of Art Deco, a popular style of the 1920s and 1930s, the building has sculptural work done by Alvin Meyer. At the top of the building is a faceless statue of the Roman goddess of architecture, Ceres. The statue was left faceless as the sculptor, John Storrs, believed that the face was redundant. His contention was that the building was so high that the statue’s face would not be visible to anyone as the 45 storied building stood much taller than any nearby structure. However, now many skyscrapers stand close and surround the Board of Trade building in the city’s busy Loop business centre.

CBOT Trading Systems

Pit Trading

The traditional open outcry trading system is still prevalent in CBOT and carried on from several pits. A pit is that part of the floor of an exchange where trading is carried on. The octagonal-shaped CBOT pits are designed like an amphitheatre with steps leading up to the pit from the outside and leading down on the inside. The design allows hundreds of traders to interact with each other during regular trading hours. The importance of open outcry trading or pit trading to CBOT can be gauged by the fact that a stylized pit is used as CBOT’s logo. The Pit is also the title of a classic novel by Frank Norris on wheat speculation and trading pits.

Pit trading is a physical system involving yelling and physical gestures for conveying the intentions of a trader. Everything is standardized and there is usually no ambiguity. As an example, the price is always mentioned before quantity while buying. For selling, it is the other way round. So if a trader wants to buy five contracts at the price of ten, he will yell 10 for 8. If he is to sell, he will yell 8 at 10.

The pit is a noisy place and it is difficult to hear what the other person is saying. To avoid misinterpretation traders use physical gestures along with yelling. Palm facing inwards towards the face and index finger on the forehead signifies ten; for one the index finger is placed on the chin. Palm facing outwards showing five fingers denotes five. The legend for yelling and physical gestures have been compiled and published.

The arrival of electronic trading has more or less made pit trading redundant. However, pit trading is still the best place for complex trades and getting better spreads.

E-Trading Or Electronic Trading

Electronic trading is the use of computer software, web-based or downloadable versions, for trading in securities as well as futures and options.


Synonyms For Chicago Board Of Trade


CBOT

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Definition Sources


Definitions for Chicago Board Of Trade are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 15th April, 2020 | 2 Views.