CBOT ®

Trading In Futures–An Introduction

Contents
Introduction .................................................................................................................................................... 1

What is a Futures Contract? .................................................................................................................... 1

Offset................................................................................................................................................................ 2
Delivery ............................................................................................................................................................ 2

Profit Opportunities with Futures ............................................................................................................ 2

Long or Short .................................................................................................................................................. 2

Why Trade a Futures Contract? ................................................................................................................ 3

Leverage .......................................................................................................................................................... 3
Liquidity............................................................................................................................................................ 4
Transparency.................................................................................................................................................... 4
Financial Integrity ............................................................................................................................................ 4

Types of Traders.............................................................................................................................................. 5
Public Traders .................................................................................................................................................. 5
“Local” Traders ................................................................................................................................................ 6
Proprietary Traders .......................................................................................................................................... 6
Market Makers ................................................................................................................................................ 6

How Traders Trade ........................................................................................................................................ 6

Scalpers .......................................................................................................................................................... 6
Day Traders...................................................................................................................................................... 7
Position Traders .............................................................................................................................................. 7

How Traders Access the Market.............................................................................................................. 7

Market Mechanics and Terminology ...................................................................................................... 9

The Contract and Trading Month .................................................................................................................... 9
Contract Pricing in Ticks ................................................................................................................................ 9
Reading the Prices ........................................................................................................................................ 10
Volume and Open Interest.............................................................................................................................. 11

The Route of an Order ................................................................................................................................ 11

Types of Orders .............................................................................................................................................. 12

Market Order .................................................................................................................................................. 12

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 Limit Order ...................................................................................................................................................... 12
Stop Order ...................................................................................................................................................... 12

Order Duration ................................................................................................................................................ 13

Position and Price Limits .......................................................................................................................... 13

What is an Options Contract? .................................................................................................................. 13

Using Fundamental Analysis to Forecast Prices .............................................................................. 14

Using Technical Analysis to Forecast Prices .................................................................................... 16

Chart Formations ............................................................................................................................................ 16
Moving Averages ............................................................................................................................................ 17
Volume and Open Interest.............................................................................................................................. 18

Trading Guidelines ........................................................................................................................................ 18

1. Buy low and sell high ................................................................................................................................ 19
2. Determine the right size for your trading account .................................................................................... 19
3. Set definite risk parameters ...................................................................................................................... 20
4. Pick the right contract(s) ............................................................................................................................ 20
Volatility .............................................................................................................................................. 20
Liquidity .............................................................................................................................................. 20
Contract Size...................................................................................................................................... 21
Margins .............................................................................................................................................. 21
5. Diversify ...................................................................................................................................................... 21
6. Have a trading plan .................................................................................................................................... 21
7. Stick to it .................................................................................................................................................... 22
8. Begin with simulated trading...................................................................................................................... 22
9. Select a good broker.................................................................................................................................. 22

Professional Money Management .......................................................................................................... 23

Expanding Your Trading .............................................................................................................................. 23

Glossary ............................................................................................................................................................ 25

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INTRODUCTION
The keys to a futures trader’s success are typically knowledge, hard work, a disciplined approach and
a dedication to master their profession. If you plan to follow this path, this booklet and the Chicago
Board of Trade (CBOT) web site at www.cbot.com can help.

What is a Futures Contract?

A futures contract is a legally binding agreement to buy or sell a commodity or financial instrument
sometime in the future at a price agreed upon at the time of the trade. While actual physical
delivery of the underlying commodity seldom takes place, futures contracts are nonetheless
standardized according to delivery specifications, including the quality, quantity, and time and
location. The only variable is price, which is discovered through the trading process. As an
example, when a trader purchases a December CBOT mini-sized silver contract he is agreeing
to purchase 1,000 troy ounces of silver for delivery during the month of December. The quality
of the product is standardized so that all December CBOT mini-sized silver futures contracts
represent the same underlying product.

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 Offset
The standardization of futures contracts
affords tremendous flexibility. Because futures
contracts are standardized, sellers and buyers
can exchange one contract for another and
“offset” their obligation to take delivery on
a commodity or instrument underlying the
futures contract. Offset in the futures market
means taking another futures position
opposite or equal to one’s initial futures
transaction. For example, if a trader bought
one December CBOT mini-sized silver
contract, he must sell one December CBOT
mini-sized silver contract before the contracts
call for delivery.
Delivery
Traders sometimes joke about having a
truckload of soybeans dumped in their front
yard as a result of a futures trade. While the
potential for delivery is vital to linking cash and
futures prices, in reality, very few futures trades
result in delivery and as a result of the formal
delivery process and facilities, you never have
to worry about taking delivery of the soybeans
in your front yard.
Delivery on futures positions begins on the first
business day of the contract month. Typically,
the oldest outstanding long (buy position) is
selected to match a short’s (sell position)
intention to deliver. Some futures contracts
have a cash-settlement process rather than
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physical delivery. For instance, if you held
a position in the Dow futures contract until
expiration, you would simply receive (or pay)
the final gains (or losses) on the contract
based on the difference between the entry
price and final settlement price.
While most futures traders offset their
contracts, if a futures contract is not offset,
the trader must be ready to accept delivery of
the underlying commodity. Futures contracts
for most physical commodities, such as
grains, require market participants holding
contracts at expiration to either take or make
delivery of the underlying contract. It’s this
responsibility to make or take delivery that
forces futures prices to reflect the actual cash
value of the commodity.
Profit Opportunities with Futures
Long or Short
With futures, the trader can profit under a
number of different circumstances. When the
trader initially purchases a futures contract he
is said to be “long,” and will profit when the
market moves higher. When a trader initially
sells a futures contract he is said to be “short”
and will profit when the market moves lower.
Going short in a futures market is much easier
than going short in other markets. Other
markets sometimes require the trader to
actually own the item he is shorting, while this
is not the case with futures. Like most other
markets, a profit is obtained if you initially buy
low and later sell high or initially sell high and
later buy low.
Why Trade a Futures Contract?
Leverage
One of the key benefits of trading in the
futures markets is that it offers the trader
financial leverage. Leverage is the ability of
a trader to control large dollar amounts of a
commodity with a comparatively small amount
of capital. As such, leverage magnifies both
gains and losses in the futures market. For
example, if a trader buys one soybean
contract (5,000 bushels) at $6.50 per bushel
($32,500 per contract), the required amount
to trade, known as “margin,” might be
approximately $1,400 (approximately 4
percent of the contract value), or about 28
cents per bushel. So for $1,400 the trader
can purchase a contract that has a delivery
value of $32,500.
The benefit of leverage is available because
of the margin concept. When you buy a
stock, the amount of money required is equal
to the price of the stock. However, unlike
trading a stock, a futures contract transaction
requires both the buyer and seller to post a
performance bond margin. To provide another
example, the margin required for a T-bond
contract worth $100,000 may be as little as
$2,400. As you can see, minimum margin
requirements represent a very small
percentage of a contract’s total value.
To trade a futures contract, the amount you
must deposit in your account is called initial
margin. Based on the closing prices on each
day that you have that open position, your
account is either debited or credited daily for
you to maintain your position. For example,
assume you bought 1 CBOT corn futures
contract (5,000 bushels) at a price of $2.25
per bushel and posted initial margin. At the
end of the trading day, the market closed at
$2.30, resulting in a gain of 5 cents per bushel
or a total of $250 (5,000 bushels x $.05). This
amount will then be credited to your account
and is available for withdrawal. Losses, on the
other hand, will be debited. This process is
called market-to-market.
Subsequent to posting initial margin, you
must maintain a minimum margin level called
maintenance margin. If debits from market
losses reduce your account below the
maintenance level, you’ll be asked to deposit
enough funds to bring your account back
up to the initial margin level. This request for
additional funds is known as a margin call.
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 Because margins represent a very small
portion of your total market exposure, futures
positions are considered highly leveraged.
Such “leverage,” the ability to trade contracts
with large underlying values, is one reason
profits and losses in futures can be greater
than trading the underlying cash contract. This
can be an attractive feature of futures trading
because little capital is required to control
large positions. At the same time, a bad trade
can accrue losses very quickly. In fact, a trader
can lose more than his initial margin when
trading futures. This is why successful traders
must develop a sound trading plan and
exercise great discipline in their trading
activities. For specific margin amounts for
each futures contract, you can look at the
online margin requirements at www.cbot.com.
Liquidity
Another key benefit of futures trading is
liquidity. Liquidity is a characteristic of a
market to absorb large transactions without a
substantial change in the price. Liquid markets
easily match a buyer with a seller, enabling
traders to quickly transact their business at
a fair price. To view liquidity in action you can
visit the CBOT web site and view the live
“book.” This shows all the bids (to buy) and
offers (to sell) on both sides of the CBOT
gold contract, for instance. You will notice that
within the first five price increments (known
as “ticks”) there is typically an average of 300
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contracts to either buy or sell. This is
considered a very liquid market, meaning
that for all practical purposes the trader can
buy or sell at a fair price.
Some traders often equate liquidity with
trading volume, concluding that only markets
with the highest actual number of contracts
traded are the most liquid. However, for some
contracts, the Chicago Board of Trade has
a market maker system in place to promote
liquidity. For contracts with a market maker, a
trader or firm designated as the market maker
then makes two-sided markets (both bids and
offers) for a specific quantity.
Transparency
Many futures markets such as those at the
CBOT are considered to be “transparent”
because the order flow is open and fair.
Everyone has an equal opportunity for the
trade. When an order enters the marketplace,
the order fills at the best price for the
customer, regardless of the size of the
order. With the advent of electronic trading,
transparency has reached new heights as
all transactions can be viewed online in real
time. In a very general sense, transparency
makes all market participants equal in terms
of market access.
Financial Integrity
When making an investment, it is important to
have confidence that the person on the other
end of the trade will acknowledge and accept
your transaction. Futures markets give you
this confidence through a clearing service
provider system that guarantees the integrity
of your trades. Clearing service providers, in
conjunction with their clearing member firms,
create a two-tiered guarantee system to
protect the integrity of futures and options
markets. One tier of the system is that the
clearing service provider acts as the
counterparty to futures and options trades—
acting as a buyer to every seller and a seller
to every buyer. The other tier is that clearing
firms extend their own guarantee to buyers
and sellers who are not clearing firms. All firms
and individuals who do not hold memberships
or ownership interests in the clearinghouse
must “clear” their trades through a clearing
firm, which then guarantees these trades
to the clearinghouse. This allows all
market participants to rest easier because
clearing firms will make good on the trades
they guarantee, even if the original
counterparty defaults.
Types of Traders
Traders play a vital role in the futures
markets by providing liquidity. While futures
are designed primarily to assist hedgers in
managing their exposure to price risk, the
market would not be possible without the
participation of traders, or speculators, who
provide a fluid market of buyers and sellers.
Speculators provide the bulk of market
liquidity, which allows the hedger to enter and
exit the market in a more efficient manner. In
summary, the two main categories of traders
are hedgers and speculators. Hedgers are
those who use the futures market to manage
price risk. Speculators, on the other hand, are
those who use the futures market for the profit
motive. As such, the speculator assumes a
market risk for the potential opportunity to
earn a profit.
Futures traders can also be categorized in
a number of other ways. There are full-time
professional traders and part-time traders;
traders who trade on the trading floor or
behind a computer screen. Each of these
market participants plays an important role
in making the markets efficient places to
conduct business.
Public Traders
The vast majority of speculators are individuals
trading off the floor with private funds. This
diverse group is generally referred to as “retail”
business. With the growing movement from
trading on the floor to the computer screen,
the retail customer is becoming a more
important force in futures trading. Further,
with computer-based trading, “leveling the
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 playing field” between the different types of
traders has become a reality.
“Local” Traders
Perhaps the most visible and colorful
speculator is the professional floor trader,
or local, trading for his own account on the
floor of an exchange. Locals come from all
walks of life and frequently began their careers
as runners, clerks or assistants to other
traders and brokers. Locals are usually more
interested in the market activity in the trading
pit as opposed to the market activity in the
underlying market fundamentals. With the
popularity of electronic trading sweeping the
industry, a trader who operates in a fashion
similar to a floor local has emerged—the
“electronic local.” The electronic local trades
using the same method as the local except
they do so through the Internet and a
computer rather than in the trading pits
of Chicago.
Proprietary Traders
Another major category of trader is the
proprietary trader, who works off the floor for
a professional trading firm. These “upstairs”
traders are employees of large investment
firms, commercial banks and trading houses
typically located in major financial centers.
This group has a number of different trading
objectives. Some engage in speculative
trading activity, profiting when the market
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moves in their direction. Such proprietary
traders are compensated according to the
profits they generate. Other proprietary
traders manage risk, hedging or spreading
between different markets—both cash and
futures—in order to insulate their business
from the risk of price fluctuation or exploiting
differences and momentary inefficiencies in
market-to-market pricing.
Market Makers
Market makers give liquidity to the market,
constantly providing both a bid (expression
to buy) and an offer (expression to sell).
Increasingly important in electronic markets,
market makers ensure that traders of all
kinds can buy and sell whenever they want.
Market makers often profit from the “spread,”
or the small difference between the bid and
offer (or ask) prices.
How Traders Trade
Each of the types of traders previously
described uses a different strategy to achieve
his goals.
Scalpers
A scalper trades in and out of the market
many times during the day, hoping to make
a small profit on a heavy volume of trades.
Scalpers attempt to buy at the bid price and
sell at the ask price, offsetting their trades
within seconds of making the original trade.
Scalpers rarely hold a position overnight and
often don’t trade or make predictions on the
future direction of the market. Locals and
market makers often employ a scalping
strategy, which is the most common source
of market liquidity.
Day Traders
A day trader is similar to a scalper in that he
or she also typically does not hold positions
overnight and is an active trader during the
trading day. Day traders trade both off and
on the floor. A day trader makes fewer trades
than a scalper, generally holds his positions
for a longer period of time than a scalper, and
trades based on a prediction on the future
direction of the market. Proprietary traders,
locals and public traders are often day traders.
Position Traders
A position trader might make one trading
decision and then hold that position for days,
weeks or months. Position traders are less
concerned with minor fluctuations and are
more focused on long-term trends and market
forces. Public traders and proprietary traders
are often position traders.
How Traders Access the Market
Once you’ve decided that you want to trade
futures, you’ll want to determine a strategy
to follow and determine how you want your
trades executed. If you’re new to the markets,
it’s particularly important to get professional
assistance and educate yourself about the
various trading strategies and trade execution
methods. Professional assistance can come in
the form of a full-service broker providing you
market and trading advice. Some full-service
brokers provide advisory newsletters to give
you a sense of how the market operates,
and provide more specific advice and trade
recommendations. You can find qualified
brokers, trading strategies and advisory
newsletters at www.cbot.com.
Another trading alternative to gain exposure to
the markets is to invest in a managed futures
fund, where your money will be pooled with
that of many other investors. With this
increasingly popular method, a professional
fund manager makes trading decisions with
the pool of funds. Most major brokerage
houses offer managed accounts, as do
numerous independent fund operators.
You’ll want to research the fund’s historical
performance and the manager’s trading style
before deciding on the fund in which to invest.
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 Once you’ve become fully experienced and
want to make your own trading decisions,
you may consider using a discount broker
for execution purposes only. Numerous
discount futures brokerage firms specialize
in providing trade executions to both public
and proprietary traders. You will also have
to decide if you want to trade electronically
through the Internet or by calling your discount
broker, or both. Additionally, you may want to
access advanced charts and trading tools
used by professional and proprietary traders.
You can do this by subscribing to services
such as those at www.cbot.com/advantage.
Regardless of your approach, it will be
helpful to become familiar with the most
important terms and procedures in the futures
markets. The next section will introduce you
to these basics.

Exchanges such as the Chicago Board

of Trade provide real-time access to
quotes and online charts of some of
their products, such as this live chart
of the mini-sized Dow future.

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Market Mechanics and Month Codes
Terminology
Month Code
January F
In order to understand the futures markets,
February G
it is essential to become familiar with basic
March H
terminology and operations. While trading
April J
rules and procedures of each futures
May K
exchange vary slightly, these terms tend to
June M
be used consistently by all U.S. exchanges.
July N
August Q
The Contract and Trading Month September U
All futures have assigned a unique one- or October V
two-letter code that that identifies the contract November X
type. This abbreviation, or ticker symbol, is December Z
used by the CBOT electronic clearing platform
and others to process all transactions. For pricing. Each futures contract has a minimum
instance, the symbol for the Dow Future is price increment called a tick size. The term
DJ, while the symbol for the mini-sized Dow tick size, or simply tick, dates back to the old
future is YM. This symbol is important when ticker tape machines, which were the original
you trade electronically because if you enter means of conveying price information from
the wrong symbol you could trade the the trading floor. Traders use the word tick
wrong contract. to express the contract’s price movement or
the amount of their profits or losses.
In addition to the contract code, you also
need to know the month and year code. Another term you will have to understand
For instance, the month code for March is the multiplier, which determines the value
is H. So if you were trading the March Dow of each tick. You can determine the value
future in 2005 the code would be DJH5. of a day’s price movement by multiplying
You can obtain a full list of contract symbols the movement in ticks by the multiplier.
at www.cbot.com. For example, suppose the multiplier on the
mini-sized Dow future is $5. If the Dow future
Contract Pricing in Ticks moved up 10 ticks in one day, one long
It is obviously important to understand a contract would have gained $50 in value
contract’s value. This is how you determine (10 index ticks x $5 multiplier = $50).
profit and loss, as well as entry and exit

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 Reading the Prices
In addition to www.cbot.com, numerous
national and local newspapers publish
futures and options prices, as well as other
information such as daily volume and open
interest. The table below shows how to read
CBOT Dow futures in The Wall Street Journal.
Current prices and the previous day’s settle-
ment prices can be found online at several
web sites, including www.cbot.com.
previous settlement price. In this case, the
price of the June contract increased by 129
index points.
4. These two columns display the highest and
lowest pricees ever reached for each delivery
month since the contract began trading.
5. Finally, the total open interest, or outstanding
positions, for each contract month is shown.

6. Across the bottom is the total estimated

volume for CBOT® DJIASM futures traded on
1. The first column indicates the delivery month.
that day, the actual volume from the previous
day, the total open interest in all delivery
2. Following are the opening price, the high and
months, and how much open interest has
low price for that day, and the final settlement
increased or decreased from the prior trading
price. In this case, the June contract settled
day, including delivery months not shown.
at 10379.

7. Preliminary numbers of the underlying

3. This column indicates how much today’s
cash market.
settlement price is higher or lower than the

2 3 4 5
1

Reprinted by permission of the Wall Street Journal,

©2004 Dow Jones & Company, Inc. All rights reserved worldwide.

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Volume and Open Interest
Next to price, volume is the most frequently
cited statistic in reference to a futures
contract’s trading activity. Each unit of volume
represents a contract traded. When a trader
buys a contract and another trader sells that
same contract, that transaction is recorded
as one contract being traded. Therefore,
the volume is the total number of long or
short positions.
Open interest, on the other hand, refers to the
number of futures positions that have not been
closed out either through offset or delivery. In
other words, the futures contracts that remain
open, or unliquidated, at the close of each
trading session.
To illustrate, assume that a trader buys 15
contracts and then sells 10 of them back to
the market before the end of the trading day.
His trades add 25 contracts to the day’s total
volume. Since 5 of the contracts were not
offset, open interest would increase by 5
contracts as a result of his activity.
Volume and open interest are reported daily
and are used by traders to determine the
participation in a market and the validity of
price movement. For instance, if a market
moves higher on low volume some traders
may not consider this an important price
movement. However, the same price
movement on high volume would indicate
that an important trend may be emerging.
Combining volume and open interest also
yields an interesting perspective on the
market. If a contract experiences relatively
low volume levels but high open interest,
it is generally assumed that commercial
participation is high. This is because
commercial hedgers tend to use the markets
for longer-term hedging purposes, putting
their trades in and keeping them until they’re
no longer needed to manage a given price
risk. Conversely, high volume with low open
interest may indicate more speculative market
activity. This is because the majority of
speculators prefer to get in and out of the
market on a daily basis.
The Route of an Order
As a public speculator, your futures trades
must go through a registered broker at a
Futures Commission Merchant (FCM).
FCMs are brokerage firms licensed to handle
customer business in the futures markets.
When you instruct your broker to make a trade
on your behalf, or when you execute a trade
through the computer, the FCM is responsible
for routing that trade to the appropriate trading
area. Trade confirmations are relayed back to
the customer. With computer-based trading,
11
 the whole process happens in a matter of
seconds. Verbal orders placed through a
human broker can take slightly longer.
Types of Orders
At the most basic level, you can place an
order to buy a futures contract (go long) or
sell (go short).
There are many different types of orders to
enter in the futures markets: a market order,
a limit order, and a stop order, to name a few.
Your decision about which type of order to
use will depend on your trading objectives
and market conditions.
It is vital that you and your broker
understand and agree on the type of order
you are entering. Mistakes can be costly,
but can almost always be avoided with
clear communication.
Following are the most regularly used orders:
Market Order
The most common type of order is the market
order. When you enter a market order, you
simply state the number of contracts you want
to buy or sell in a given delivery month. You
do not need to specify price, since your
objective is to have the order executed as
soon as possible.
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When the order reaches the trading floor, or
the electronic matching engine in the case of
computer-based trading, it is executed at the
best possible bid/ask price at that moment.
The market order is usually filled in a quick
fashion at a price based on the current bids
and offers.
Limit Order
A limit order specifies a price limit at which
the order must be executed. In other words,
it must be filled at that price or better. The
advantage of a limit order is that you know
the worst price (limit price) you’ll get if the
order is executed, and there is a possibility
that the price may be better than your limit.
The disadvantage is that your order might
not get filled if the market doesn’t reach that
price level or if the trading activity at that price
level is limited.
Stop Order
Stop orders are not executed until the market
reaches a given price, at which time the stop
order becomes a market order. Some stop
orders are referred to as stop-loss orders,
which most often are used as a protective
measure for gains or limiting losses. Many
times a trader will put a stop order in at a
predetermined level so that if the market
moves against the trader’s position it will
automatically liquidate the position and limit
further losses.
Stop orders can also be used to enter the
market. Suppose you expect a bull market
only if the price passes through a specified
level. In this case, you could enter a buy-stop
order to be executed if the market reaches
reached this point. For instance, let’s say the
mini-sized Dow future was trading at 10,500.
You could place a sell stop order at 10,540,
and when the market reached that level your
order will would then become a market order
to sell.
One variation is the stop-limit order. With this
type of order, the trade must be executed at
the exact price (or better) or held until the
stated price is reached again. If the market
fails to return to the stop-limit level, the order
is not executed.
Order Duration
In addition to the type of order, it is also
important to determine the duration of an
order. Most orders are day orders and work
only during that trading session, expiring at
the end of the day. On the other hand, open
orders, or good ’til canceled (GTC) orders,
are worked until the contract expires or the
customer cancels the order. Fill or kill orders
are placed and then immediately canceled if
they do not fill. Market on close orders place a
market order at the close of the trading day.
Position and Price Limits
In order to maintain orderly markets, futures
exchanges typically set both position and price
limits. A position limit is the maximum number
of contracts that may be held by a single
market participant. While position limits
typically apply to speculators, hedgers
have position limits that are related to their
underlying physical market position.
Price limits, also called daily trading limits,
specify a maximum price range allowed each
day for a contract. Further, price limits are
lifted when the delivery process of a particular
contract month begins. Usually, the price limits
are removed beginning with the last two
business days prior to the contract month.
Many traders will usually close out their
positions prior to the delivery process,
because the volatility may increase beyond
a level they prefer. The daily price limits for
CBOT futures contracts appear in their
individual contract specifications page on
www.cbot.com, as do position limits.
What is an Options Contract?
While the focus of this booklet is primarily on
futures, it is also important to understand the
opportunities options present to the trader.
Both futures and options are traded at most
major futures exchanges, including the CBOT.
13
 An option is a contract that gives the buyer
the right, but not the obligation, to buy or sell
a particular futures contract at a fixed price for
a specific period of time. The contract also
obligates the seller to meet the terms of
delivery if the contract right is exercised by the
buyer. When someone buys a call option on
corn futures, they are buying the right to
purchase that underlying corn futures contract
at a specific price, known as the strike price,
at a future point in time, known as the
expiration date. When a trader buys a corn
put, they have the right to sell the underlying
corn futures contract. Buyers of calls and puts
receive these rights in return for paying the
value (price) of the rights, know as the option
premium. Option buyers have a limited and
known loss potential (the amount of premium
paid). Due to the rights an option buyer has,
their profit potential is virtually unlimited.
On the other hand, speculators could sell calls
and puts. They have obligations to fulfill the
rights given to the option buyer. In return for
these obligations, the option seller receives
the premium. Sellers of options have a limited
amount of potential gain (the amount of
premium received) while they have unlimited
loss potential. Most traders that sell options
will usually have other positions to offset the
risk of their short option position.
14
Futures Positions After Option Exercise
Call Option Put Option
Buyer Assumes Long futures Short futures
position position
Seller Assumes Short futures Long futures
position position
Using Fundamental Analysis to
Forecast Prices
There are two primary methods traders
use to forecast future price movement:
Fundamental Analysis and Technical Analysis.
We will explore fundamental analysis over
the course of the next few pages, then
examine technical analysis.
If you could predict the direction of prices
with perfect accuracy, you would obviously
have no trouble making a fortune in the futures
markets. Assuming that you can’t, however,
an alternative would be to learn the forecasting
techniques used by successful traders. One
method, called fundamental analysis, is based
on market economics, also known as supply
and demand information.
Fundamental analysis applies to all markets
including agricultural, financial, equity and
metals. Much of the fundamental trade centers
upon the release of key government reports.
If these official reports are in line with the
market’s expectations, the impact on market
prices will be minimal. When actual figures
vary from expectations, market prices can
respond dramatically.
Days on which key reports are released can
present real trading opportunities due to the
resulting dramatic swings in price. To take
advantage of these opportunities, you must
understand the meaning and potential impact
of the report, as well as the market’s prior
expectations. Some brokers pride themselves
on their ability to assist you in assessing
this information. Some exchanges, like the
CBOT, provide intraday market commentary,
which usually includes information from the
reports and the impact on the markets.
This commentary can be found on the
CBOT website.
It’s also important to keep in mind that price
volatility is usually higher on release dates.
Even if you don’t intend to trade based on a
given number, you may find the value of any
open positions changing significantly on these
days. Of course, this could work to your
benefit or your detriment. In any event, it’s
important to understand the impact of the
major reports and other critical events,
regardless of whether or not you intend to
trade on fundamental information.
Like any trading method, fundamental
analysis has its limitations. Key statistics
can be reported inaccurately, resulting in your
subjective interpretation of the information
being incorrect. New data is always filtering
through the markets and creating price
changes. Opportunities can come and go
before you even have a chance to react.
And while one piece of information may point
clearly in one price direction, other factors
can combine to drive prices the other way.
Although forecasting futures prices is clearly
tricky business, all traders face the same set
of challenges. It’s probably best to concentrate
at first on only one or two related futures
markets. Since so many factors can influence
prices, limiting your efforts in this way will
make fundamental analysis a much more
manageable task.
The CBOT provides traders with monthly
calendars for the agricultural and financial
markets that list the economic reports
scheduled for release each month. These
calendars can be viewed online at
www.cbot.com. Whether you choose to
focus on agricultural or financial futures
markets, a good understanding of
15
 fundamental price information will go a long
way toward improving your trading success.
But fundamental analysis is just one method.
Using Technical Analysis to
Forecast Prices
Technical analysis is another technique. Some
traders only use technical analysis to make
trading decisions, while others use some
combination of fundamental and technical
analysis to determine if they want to be long
or short and to time their trades.
The technical analyst focuses purely on market
information—primarily price movements, but
also volume and open interest figures. The
pure technician works on the assumption that
all fundamental information is already reflected
in the price, and that it is more important to
study the market’s resulting price behavior.
Unlike the fundamental analyst, the
market technician is not concerned with
understanding the underlying fundamental
news surrounding why the market moved.
Rather, the technician attempts to predict
future price direction by looking at previous
patterns of price behavior. For instance, if
selling continually occurred at a certain price,
the technician would conclude that price point
represented “resistance” where sellers would
likely emerge in the future to drive prices
16
down. The technician would then sell at
that point on the assumptions that prices
would drop.
Charts, tables and graphs are the major tools
of the technical analyst. Traders can organize
and analyze market data in any number of
ways depending on their preference.
Traders use charts to identify price trends,
special patterns or formations, and areas of
support and resistance. Price support occurs
where there is sufficient buying of the futures
contract to halt a price decline. Resistance,
on the other hand, refers to a ceiling where
selling pressure can be expected to stop a
rally. When the market trades sideways for an
extended period of time, it is said to be in a
consolidation phase.
Chart Formations
The study of technical indicators is quite
extensive, certainly encompassing much more
detail than can be provided here. It’s possible,
however, to introduce the general concepts of
charting and the major chart patterns.
Keep in mind that while a sequence of price
movements often indicates the likelihood of
future direction, exceptions to past patterns
can always occur. The best traders
understand how to appropriately interpret
these “chart patterns” and often have in place
a back-up plan if the market moves in an
unanticipated direction. You can find CBOT
charts, such as the live mini-sized Dow chart,
online at www.cbot.com to test your skill at
interpreting them.
Moving Averages
Moving averages provide another tool for
tracking price trends. In its simplest form,
a moving average is an average of prices
calculated over a given period of time. For
example, a 10-day moving average takes the
last 10 closing prices, adds them up, and
divides by 10. On the next day, the oldest
price is dropped, the newest price is added,
and these 10 prices are divided by 10 to
obtain the average. In this manner, the average
“moves” each day.
Moving averages can provide the technician
clues to the relative strength or weakness of a
given market. For instance, when the market is
above its 50-day moving average it is thought
that the market is in an uptrend. Some moving
averages are also viewed as support and
resistance points. In this sense, moving
averages provide opportunities for the trader
to enter and exit the market. For instance,
when a market drops lower to reach a major
moving average the trader might choose to go
long in the market
Moving averages are said to take the “noise”
out of the price movement. This is due in
large part to the smoothing effect of a moving
average. If an upward-trending market
suddenly has one day of lower prices, a
moving average would factor that day’s
price in with several other days—thus
lessening the impact of one trading day
on the moving average.
As long as there is generally more buying
than selling pressure, the moving average will
continue to indicate an uptrend. Conversely,
a downtrend will be sustained as long as there
is more selling than buying pressure.
To help identify entry and exit points, moving
averages are frequently superimposed onto
bar charts. When the market closes above
the moving average, a buy signal may be
generated. As well, a sell signal may result
when the market moves below the moving
average. Some traders prefer to see the
moving average line actually change direction
before declaring a buy or sell signal.
The sensitivity of the moving average line
relates directly to the length of time chosen
for the average. For instance, a 5-day moving
average will be more sensitive and will
potentially prompt more buy and sell signals
than a 20-day moving average. If the average
is too sensitive, you may find yourself jumping
17
 in and out of the market too often—paying
excessive transaction costs. If the moving
average is not sensitive enough, you may
miss opportunities by identifying buy and
sell signals too late.
Moving averages can be used in any number
of ways, and traders develop their personal
favorites. Besides selecting the length of time
for a moving average, you can also alter the
types of prices used. While closing prices are
most common, some traders use an average
of the high, low and closing prices. Some
traders run two moving averages, one of
high prices and another of the low prices,
effectively creating a channel of prices. It is
also possible to weight a moving average line
so that the recent prices carry greater impact
than older prices.
While experimenting with various moving
averages may sound like tedious work, the
computer has made this task easier. In any
event, you should recognize that a moving
average, unlike a chart formation, is not a
forward-looking indicator. Rather, it follows
the market and identifies only established
trending patterns.
Volume and Open Interest
While the primary focus of the technician tends
to concentrate on price information, additional
insight into the market can be gained by
18
adding the dimensions of volume and open
interest. Volume and open interest are
considered confirming indicators, providing
clues about how much strength is behind
a trend. For example, if volume and open
interest increase with prices, it is considered
a healthy sign of a solid bull market. The longs
are eager to add to their positions, and new
longs are attracted to the market. If prices fall
momentarily, and volume declines as well, the
bull market is probably not in jeopardy since
this may reflect only a small sell-off.
Generally, strong volume and increasing open
interest support a price trend, regardless of its
direction. At the same time, this scenario is
more likely to occur in a bull market since
many public speculators are more naturally
inclined to buy into a rally than to sell into a
bear market.
When looking at open interest trends, it’s
also important to keep a couple of other
points in mind. First of all, many of the physical
commodity markets (such as grains) have
historical open interest patterns, or seasonality
factors. For this reason, changes in open
interest should be considered in relative terms.
Secondly, many futures contracts will show
a sharp drop in open interest as a delivery
month approaches expiration. By looking
at the behavior of open interest during past
delivery months, you can judge better whether
a current open interest trend is stronger or
weaker than past patterns.
The technical analysis methods introduced
here barely scratch the surface of charting
techniques and technical trading systems.
Numerous other methods have been
developed. Many proprietary trading systems
are also available as software programs or
online services.
When comparing technical to fundamental
analysis, you’ll find advantages and
disadvantages. The primary advantage of
technical analysis is that you can follow several
markets much more easily than when using
a fundamental approach. If one market isn’t
doing much, you can monitor others for
developing trends.
One disadvantage of technical trading is that
you’ll find many other traders looking for the
same signals you’re hoping to identify. As a
result, when a distinct chart pattern does
develop, many orders may be sitting under
the market waiting for the same trigger price.
It is important to keep this in mind and to
make your decisions carefully about what
types of orders to use and how.
Since both technical and fundamental analysis
have their strengths and weaknesses, it is
unusual to find traders who use one
exclusively. Many will follow fundamentals
to get a broader picture of the market, while
using technical analysis to fine tune their
strategy and select entry and exit points.
Yet others who claim to be technicians will
keep an eye on the fundamentals to confirm
or revise their trading decisions.
Trading Guidelines
Regardless of whether you prefer a
fundamental or technical approach to making
trading decisions, your ultimate success will
hinge largely on your ability to develop good
trading habits. Numerous expressions of
market wisdom attempt to give guidance.
Phrases like “cut your losses and let your
profits run” or “the trend is your friend” are
helpful but a bit vague. What then are some
helpful guidelines that can improve your
results? The following 10 rules will go a
long way toward getting you started on the
right path.
1. Buy low and sell high
This may sound obvious, but since it’s the
only way to earn trading profits, it bears
reporting. Also don’t forget that in the futures
markets you can easily do the reverse—sell
high and buy low. Bulls start their trades with
a long (buy) position and bears are initially
short (sellers).
19
 For example, if you expected a rally in July
wheat futures, you might enter the market
with a long (buy) position at $3.50 per bushel.
Over the next two weeks, suppose July wheat
futures moved up to $3.60. If you offset
(closed out) your position at this price by
selling July wheat futures, you would realize
a gain of $500 (10 cents x 5,000 bushels)
per contract.
On the other hand, you might be bearish on
T-Note futures. Let’s assume you shorted
(sold) the December T-Note futures at 102-00.
If prices then moved down to 101-00, you
could offset (buy back) your December T-Note
futures position and make $1,000 (one full
point on a $100,000 face value bond) per
contract traded.
2. Determine the right size for your
trading account
The funds you trade should be completely
discretionary. In other words, ask yourself if
you can afford to lose whatever you invest in
that account—and potentially more. Savings
for college, retirement or emergencies should
not be included.
3. Set definite risk parameters
Before you trade, determine how much of a
loss you are willing to accept. You can express
this as a dollar figure or as a percent of the
margin amount. In either case, you should
always keep some money in reserve. By
20
setting limits up front, you may lessen the
risk of emotions dictating your decisions if
the market happens to turn against you.
Wishful thinking could easily drive you deeper
in trouble, but hard and fast parameters are
difficult to ignore.
4. Pick the right contract(s)
There are many futures contracts to choose
from and several things to consider when
deciding which ones are right for you.
Volatility
Futures contracts that experience wider daily
trading ranges are considered more volatile
and more risky. Soybeans usually have a
higher average daily price range compared
to corn. Some traders prefer a more volatile
contract because the cost of trading
(commission fees, for example) is the same,
yet the potential for a profit can be greater.
Of course, the risk for loss is also greater.
Liquidity
Make sure the futures contract you select has
enough volume and open interest to ensure
that you can exit your position just as easily
as you entered it. Getting current market
information (bids and offers and quantities at
each) is also helpful. Your broker should be
able to provide current market information,
and for some products you can view the live
markets on the Exchange’s website.
Contract Size
For some futures, you can choose between
full-sized and mini-sized contracts. Examples
of mini-sized CBOT contracts include the $5
mini-sized Dow future (compared to the $10
full-sized contract), the mini-sized corn, wheat,
and soybeans contracts (compared to the
5,000 bushel full-sized), the mini-sized T-Note
or T-Bond contract (50,000 face value
compared to the $100,000 full size), and
the mini-sized silver and gold contracts.
While economic factors usually impact both
the full-sized and mini-sized contracts, the
dollar amount at risk is less with the smaller
contract. Further, if your trading account is
relatively small, trading smaller contracts
allows you to diversify to a degree that may
not otherwise be possible. This reduces your
risk exposure to any one market. For contract
size information, check contract specifications
at www.cbot.com.
Margins
Margin levels are a function of contract
size and price volatility. While you may be
comfortable trading in volatile markets,
the size of your account and the margin
requirements may limit your selection of
which futures contracts to trade. You can
check margin requirements of various
contracts at www.cbot.com.
5. Diversify
Rather than exposing your entire trading
account to a position in one futures contract,
it is more prudent to take smaller positions in
several contracts. At the same time, you may
not want to trade too many markets at once,
or you may have a difficult time tracking
your positions and following the fundamental
information or technical indicators for
each market.
6. Have a trading plan
Before you actually enter into a futures
position, develop a plan to guide your decision
based on careful analysis of the market(s) you
plan to trade. The following are some of the
issues you’ll want to evaluate:
• What is your goal with each trade?
(To hit a given entry and exit price?
To capitalize on an anticipated market
indicator? To ride a trend for a specified
period of time?)
• How much risk is in each trade?
How much risk are you willing to accept?
• If the trade turns against my position,
at what point should you liquidate
the position?
• What types of orders will you use?
(In particular, consider the use of stop
orders to limit losses?)
• What systems will you use to monitor
market developments and price movement?
21
 You can find several strategy papers at
www.cbot.com that may be useful in
developing a trading plan.
7. Stick to it
Perhaps two of the key elements that
differentiate successful traders from the
pack are discipline and emotional control.
For instance, when the market moves against
a trader, past an exit point he had previously
established, a good trader can cut loose the
trade and accept the loss. Half the battle is
having a good plan, the other half is sticking
to that plan in the heat of the moment.
8. Begin with simulated trading
While there is no better way to learn when
your own money—and emotions—are
involved, it’s still a good idea to practice
first with simulated trading. Pick a couple
of markets to follow and experiment with
your trading plan.
You can practice trade by using an electronic
trading simulator located at www.cbot.com.
The advantage of an electronic trading
simulator is that some consider it to most
closely replicate “real world” trading
conditions. Simulated trading is a good way
to become familiar with the price quotations,
the market terminology, and the general
behavior of a particular futures contract.
22
9. Select a good broker
A broker can play an important role in your
success. There are essentially two types of
brokers: full-service and discount brokers.
Full-service brokers provide more in the way
of guidance and research support, but charge
higher commissions to execute your trades.
Discount brokers leave all the trading
decisions to you but charge much less to
execute your trades. With the popularity of
electronic trading, some discount brokers
offer options that allow you to trade entirely
through your computer. Additional information
on finding a broker can be found at
www.cbot.com.
The National Futures Association (NFA) directly
supervises the activities of all futures brokers
(officially called associated persons). All
members of the NFA must observe high
levels of conduct that extend beyond legal
requirements. The NFA investigates complaints
against its members and issues fines and
suspensions, if necessary. Contact the NFA
or visit the NFA web site (www.nfa.futures.org)
if you ever encounter serious problems
with or want to check the status of your
broker’s credentials.
Professional Money Management
If you decide that you don’t have the time
to dedicate to full-time futures trading but
still want to participate in the futures
markets, you might consider professional
money management.
One possible route is to use a Commodity
Trading Advisor (CTA) to manage your funds.
If you opt for direct money management, you
will have to give your power of attorney to the
CTA and sign a risk disclosure document. In
turn, the CTA must spell out his or her trading
program, past performance, potential risks
and fee structure.
CTAs often charge two kinds of fees to
manage your money. Almost all will charge
an incentive fee based on their trading
performance. Some also charge a
management fee that is paid regardless of
profits earned. Most require a fairly substantial
sum to open an account.
Another possibility—particularly for the smaller
investor—is to participate in a commodity
pool. Commodity pools are conceptually
similar to mutual funds. Almost all pools are
organized as limited partnerships with the
Commodity Pool Operator (CPO) acting as
the general partner. The day-to-day trading
decisions may be made by the general
partner, or the commodity pool may employ a
third party CTA.*
If you’re considering joining a pool, you will
want to check out the trading manager’s
track record and review the risk disclosure
documents. Also, be certain you know up
front how to exit the poof if you so desire.
Many pools place limitations on when this
can occur.
The primary advantage of using trading
advisors or commodity pools is that you will be
able to capitalize on someone else’s trading
expertise and significantly reduce the amount
of personal time and effort required for trading.
At the same time, professional assistance
carries a higher price tag. You will also limit
your ability to develop your own expertise.
Still, depending on your circumstances and
personal goals, professional money
management may be a viable option.
*Note that CTAs and larger CPOs must
register with the NFA. The NFA can be
consulted for background information on CTAs
and larger CPOs, or to register a complaint.
Expanding Your Trading
In general, spread trading involves the
purchase of one futures or options contract
23
 and the sale of a different but related futures or
options contract. More complex spreads can
involve more than two contracts. The goal is
to profit from changes in the relative price
movements between different but similar
markets. For example, a MOB (muni over
bond) trader may enter a spread position
that gains in value when munis outperform
T-bonds. Another example would be selling
the January CBOT mini-sized Gold futures and
buying the April CBOT mini-sized gold futures
contract. This is an example of a common
spread known as the “calendar” spread. The
primary advantage of spread trading is that
it generally entails less risk than outright
futures positions and, as a result, requires
lower margin deposits.

This booklet is only an introduction to futures

trading. It has introduced you to techniques
that can improve your understanding of the
markets and trading results. There are other
more sophisticated strategies that you can
use to profit that you can investigate by
visiting www.cbot.com.

24
Glossary
Associated Person (AP) - An individual
who solicits orders, customers, or customer
funds (or who supervises persons performing
such duties) on behalf of a Futures
Commission Merchant, an Introducing Broker,
a Commodity Trading Adviser, or a Commodity
Pool Operator.
Bear - One of the two market directional
terms. Bear represents an individual, a
market, a strategy, a trend or any other market
concept that refers to or benefits from a
“declining” market. Example. I am bearish
on the silver market so I am going to short
a CBOT mini-sized silver futures contract.
Bid - An expression indicating a desire to
buy a commodity at a given price, opposite
of offer.
Broker - A company or individual that
executes futures and options orders on
behalf of financial and commercial institutions
and/or the general public.
Brokerage Fee - A fee charged by a broker
for executing a transaction.
Brokerage House - An individual or
organization that solicits or accepts orders
to buy or sell futures contracts or options on
futures and accepts money or other assets
from customers to support such orders.
Also referred to as commission house or
wire house.
Bull - One of the two market directional terms.
Bull represents an individual, a market, a
strategy, a trend or any other market concept
that refers to or benefits from a “rising” market.
Example. I am bullish on the stock market so I
am going to go long a CBOT mini-sized Dow
Futures contract.
Call Option - An option that gives the
buyer the right, but not the obligation, to
purchase (go “long”) the underlying futures
contract at the strike price on or before the
expiration date.
Canceling Order - An order that deletes a
customer's previous order.
Cash Market - A place where people buy and
sell the actual commodities, i.e., grain elevator,
bank, etc. Spot usually refers to a cash market
price for a physical commodity that is available
for immediate delivery. A forward contract is
a cash contract in which a seller agrees to
deliver a specific cash commodity to a buyer
sometime in the future. Forward contracts, in
contrast to futures contracts, are privately
negotiated and are not standardized.
25
 Cash Settlement - Transactions involving
futures contracts that are settled in cash
based on the price of the futures contract
on the last trading day, in contrast to those
that specify the delivery of a commodity or
financial instrument.
Charting - The use of charts to analyze
market behavior and anticipate future price
movements. Those who use charting as a
trading method plot such factors as high,
low, and settlement prices; average price
movements; volume; and open interest.
Clear - The process by which a clearinghouse
maintains records of all trades and settles
margin flow on a daily mark-to-market basis
for its clearing member.
Clearing Service Provider - An entity that
settles all trades made at the Chicago Board
of Trade acting as a guarantor for all trades
cleared by it, reconciles all clearing member
firm accounts each day to ensure that all
gains have been credited and all losses
have been collected, and sets and adjusts
clearing member firm margins for changing
market conditions.
Clearing Margin - Financial safeguards
to ensure that clearing members (usually
companies or corporations) perform on their
customers' open futures and options
contracts. Clearing margins are distinct from
26
customer margins that individual buyers and
sellers of futures and options contracts are
required to deposit with brokers. See
Customer Margin. Within the futures industry,
financial guarantees required of both buyers
and sellers of futures contracts and sellers
of options contracts to ensure fulfilling of
contract obligations. FCMs are responsible
for overseeing customer margin accounts.
Margins are determined on the basis of
market risk and contract value. Also referred
to as performance-bond margin.
Closing Price - The last price paid for a
commodity on any trading day. The exchange
clearinghouse determines a firm's net gains
or losses, margin requirements, and the next
day's price limits, based on each futures and
options contract settlement price. If there is a
closing range of prices, the settlement price is
determined by averaging those prices. Also
referred to as settle price.
Commission Fee - A fee charged by a broker
for executing a transaction. Also referred to as
brokerage fee.
Commission House - An individual or
organization that solicits or accepts orders
to buy or sell futures contracts or options on
futures and accepts money or other assets
from customers to support such orders. Also
referred to as “wire house”.
Commodity - An article of commerce or a
product that can be used for commerce. In
a narrow sense, products traded on an
authorized commodity exchange. The types
of commodities include agricultural products,
metals, petroleum, foreign currencies, and
financial instruments and equity indexes, to
name a few.
Commodity Futures Trading Commission
(CFTC) - A federal regulatory agency
established under the Commodity Futures
Trading Commission Act, as amended in
1974, that oversees futures trading in the
United States. The commission is comprised
of five commissioners, one of whom is
designated as chairman, all appointed by the
President subject to Senate confirmation, and
is independent of all cabinet departments.
Commodity Pool - An enterprise in which
funds contributed by a number of persons are
combined for the purpose of trading futures
contracts or commodity options. An individual
or organization that operates or solicits funds
for a commodity pool is referred to a
Commodity Pool Operator.
Commodity Trading Adviser - A person
who, for compensation or profit, directly or
indirectly advises others as to the value or
the advisability of buying or selling futures
contracts or commodity options. Advising
indirectly includes exercising trading authority
over a customer's account as well as
providing recommendations through written
publications or other media.
Contract Month - A specific month in
which delivery may take place under the
terms of a futures contract. Also know as
the delivery month.
Customer Margin - Within the futures
industry, financial guarantees required of both
buyers and sellers of futures contracts and
sellers of options contracts to ensure fulfilling
of contract obligations. FCMs are responsible
for overseeing customer margin accounts.
Margins are determined on the basis of
market risk and contract value.Also referred
to as performance-bond margin. Financial
safeguards to ensure that clearing members
(usually companies or corporations) perform
on their customers' open futures and options
contracts. Clearing margins are distinct from
customer margins that individual buyers and
sellers of futures and options contracts are
required to deposit with brokers.
Daily Trading Limit - The maximum price
range set by the exchange cash day for a
contract. Trading limits are usually removed
when a contract begins the delivery process.
27
 Day Traders - Speculators who take
positions in futures or options contracts and
liquidate them prior to the close of the same
trading day.
Delivery - The transfer of the cash commodity
from the seller of a futures contract to the
buyer of a futures contract. Each futures
exchange has specific procedures for
delivery of a cash commodity. Some futures
contracts, such as stock index contracts,
are cash settled.
Delivery Day - The third day in the delivery
process at the Chicago Board of Trade, when
the buyer's clearing firm presents the delivery
notice with a certified check for the amount
due at the office of the seller's clearing firm.
Delivery Month - A specific month in which
delivery may take place under the terms of
a futures contract. Also referred to as
contract month.
Delta - A measure of how much an option
premium changes, given a unit change in
the underlying futures price. Delta often is
interpreted as the probability that the option
will be in-the-money by expiration.
Demand, Law of - The relationship between
product demand and price. An increase in
the demand for a commodity usually has a
28
positive impact on prices. Conversely, a
decrease in the demand for a commodity
usually has a negative impact on prices.
Note that supply and other market factors
may counter the impact of a change in
the demand.
Discretionary Account - An arrangement by
which the holder of the account gives written
power of attorney to another person, often his
broker, to make trading decisions. Also known
as a controlled or managed account.
Exercise - The action taken by the holder of
a call option if he wishes to purchase the
underlying futures contract or by the holder of
a put option if he wishes to sell the underlying
futures contract.
Exercise Price - The price at which the
futures contract underlying a call or put option
can be purchased (if a call) or sold (if a put).
Also referred to as strike price.
Expiration Date - Options on futures generally
expire on a specific date during the month
preceding the futures contract delivery month.
For example, an option on a March futures
contract expires in February but is referred to
as a March option because its exercise would
result in a March futures contract position.
Fill-or Kill - A customer order that is a price
limit order that must be filled immediately or
canceled.
Financial Instrument - There are two basic
types: (1) a debt instrument, which is a loan
with an agreement to pay back funds with
interest; (2) an equity security, which is share
or stock in a company.
First Notice Day - According to Chicago
Board of Trade rules, the first day on which
a notice of intent to deliver a commodity in
fulfillment of a given month's futures contract
can be made by the clearinghouse to a buyer.
The clearinghouse also informs the sellers who
they have been matched up with.
Floor Broker (FB) - An individual who
executes orders for the purchase or sale of
any commodity futures or options contract on
any contract market for any other person.
Floor Trader (FT) - An individual who
executes trades for the purchase or sale of
any commodity futures or options contract
on any contract market for such individual’s
own account.
Fundamental Analysis - A method of
anticipating future price movement using
supply and demand information.
Futures Commission Merchant (FCM) -
An individual or organization that solicits or
accepts orders to buy or sell futures contracts
or options on futures and accepts money
or other assets from customers to support
such orders.
Futures Contract - A legally binding
agreement, made on the trading floor of a
futures exchange, to buy or sell a commodity
or financial instrument sometime in the future.
Futures contracts are standardized according
to the quality, quantity, and delivery time and
location for each commodity. The only variable
is price, which is discovered on an exchange
trading floor.
Futures Exchange - A central marketplace
with established rules and regulations where
buyers and sellers meet to trade futures and
options on futures contracts.
Hedger - An individual or company owning
or planning to own a cash commodity, corn,
soybeans, wheat, U.S. Treasury bonds, notes,
bills etc. and concerned that the cost of the
commodity may change before either buying
or selling it in the cash market. A hedger
achieves protection against changing cash
prices by purchasing (selling) futures contracts
of the same or similar commodity and later
offsetting that position by selling (purchasing)
futures contracts of the same quantity and
type as the initial transaction.
29
 Hedging - The practice of offsetting the price
risk inherent in any cash market position by
taking an equal but opposite position in the
futures market. Hedgers use the futures
markets to protect their business from adverse
price changes. Selling (Short) Hedge - Selling
futures contracts to protect against possible
declining prices of commodities that will be
sold in the future. At the time the cash
commodities are sold, the open futures
position is closed by purchasing an equal
number and type of futures contracts as
those that were initially sold. Purchasing (Long)
Hedge - Buying futures contracts to protect
against a possible price increase of cash
commodities that will be purchased in the
future. At the time the cash commodities
are bought, the open futures position is
closed by selling an equal number and type
of futures contracts as those that were
initially purchased. Also referred to as a
buying hedge.
Holder - The purchaser of either a call or put
option. Option buyers receive the right, but not
the obligation, to assume a futures position.
Also referred to as the Option Buyer.
Initial Margin - The amount a futures market
participant must deposit into his margin
account at the time he places an order to
buy or sell a futures contract. Also referred
to as original margin.
30
Intercommodity Spread - The purchase
of a given delivery month of one futures
market and the simultaneous sale of the
same delivery month of a different, but
related, futures market.
Interdelivery Spread - The purchase of one
delivery month of a given futures contract
and simultaneous sale of another delivery
month of the same commodity on the same
exchange. Also referred to as an intramarket
or calendar spread.
Intermarket Spread - The sale of a given
delivery month of a futures contract on one
exchange and the simultaneous purchase of
the same delivery month and futures contract
on another exchange.
Introducing Broker (IB) - A person or
organization that solicits or accepts orders
to buy or sell futures contracts or commodity
options but does not accept money or
other assets from customers to support
such orders.
Last Trading Day - According to the Chicago
Board of Trade rules, the final day when
trading may occur in a given futures or option
contract month. Futures contracts outstanding
at the end of the last trading day must be
settled by delivery of the underlying
commodity or securities or by agreement for
monetary settlement (in some cases by EFPs)
Leverage - The ability to control large dollar
amounts of a commodity with a comparatively
small amount of capital.
Limit Order - An order in which the
customer sets a limit on the price and/or
time of execution.
Limits - The maximum number of speculative
futures contracts one can hold as determined
by the Commodity Futures Trading
Commission and/or the exchange upon
which the contract is traded. Also referred
to as trading limit. The maximum advance or
decline from the previous day's settlement
permitted for a contract in one trading session
by the rules of the exchange.
Liquid - A characteristic of a security or
commodity market with enough units
outstanding to allow large transactions
without a substantial change in price.
Institutional investors are inclined to seek
out liquid investments so that their trading
activity will not influence the market price.
Liquidate - Selling (or purchasing) futures
contracts of the same delivery month
purchased (or sold) during an earlier
transaction or making (or taking) delivery of
the cash commodity represented by the
futures contract. Taking a second futures
or options position opposite to the initial or
opening position.
Long - One who has bought futures contracts
or owns a cash commodity.
Low - The lowest price of the day (or any
specified time period) for a particular
futures contract.
Maintenance Margin - A minimum margin
(per outstanding futures contract) that a
customer must maintain in his margin account.
Managed Futures - Represents an industry
comprised of professional money mangers
known as commodity trading advisors who
manage client assets on a discretionary
basis, using global futures markets as an
investment medium.
Margin - Financial safeguards to ensure that
clearing members (usually companies or
corporations) perform on their customers'
open futures and options contracts. Clearing
margins are distinct from customer margins
that individual buyers and sellers of futures and
options contracts are required to deposit with
brokers. Within the futures industry, financial
guarantees required of both buyers and sellers
of futures contracts and sellers of options
contracts to ensure fulfilling of contract
obligations. FCMs are responsible for
overseeing customer margin accounts.
Margins are determined on the basis of
market risk and contract value. Also referred
to as performance-bond margin.
31
 Margin Call - A call from a clearinghouse to a
clearing member, or from a brokerage firm to a
customer, to bring margin deposits up to a
required level.
Market Order - An order to buy or sell a
futures contract of a given delivery month to
be filled at the best possible price and as soon
as possible.
Marking-to-Market - The process of debiting
or crediting all margin accounts on a daily
basis according to the settlement price of that
day's trading session. In this way, buyers and
sellers are protected against the possibility of
contract default.
National Futures Association (NFA) -
An industrywide, industry-supported,
self-regulatory organization for futures and
options markets. The primary responsibilities
of the NFA are to enforce ethical standards
and customer protection riles, screen futures
professional for membership, audit and
monitor professionals for financial and general
compliance rules and provide for arbitration of
futures-related disputes.
Nearby (Delivery) Month - The futures
contract month closest to expiration. Also
referred to as spot month.
32
Offer - An expression indicating one's desire
to sell a commodity at a given price; opposite
of bid.
Offset - Taking a second futures or options
position opposite to the initial or opening
position. Selling (or purchasing) futures
contracts of the same delivery month
purchased (or sold) during an earlier
transaction or making (or taking) delivery
of the cash commodity represented by the
futures contract.
Open Interest - The total number of futures
or options contracts of a given commodity
that have not yet been offset by an opposite
futures or option transaction nor fulfilled by
delivery of the commodity or option exercise.
Each open transaction has a buyer and a
seller, but for calculation of open interest, only
one side of the contract is counted.
Open Auction (outcry) - Method of trading
or type of trading platform for making verbal
bids and offers in the trading pits or rings of
futures exchanges.
Opening Range - A range of prices at which
buy and sell transactions took place during
the opening of the market.
Option - A contract that conveys the right, but
not the obligation, to buy or sell a particular
item at a certain price for a limited time. Only
the seller of the option is obligated to perform.
Option Buyer - The purchaser of either a call
or put option. Option buyers receive the right,
but not the obligation, to assume a futures
position. Also referred to as the holder. Option
buyers pay the premium.
Option Premium - The price of an option the
sum of money that the option buyer pays and
the option seller receives for the rights granted
by the option.
Option Seller - The person who sells an
option in return for a premium and is obligated
to perform when the option buyer exercises
their right under the option contract. Also
referred to as the writer. Option sellers collect
the option premium.
Option Spread - The simultaneous purchase
and sale of one or more options contracts,
futures, and/or cash positions.
Option Writer - The person who sells an
option in return for a premium and is obligated
to perform when the holder exercises his right
under the option contract. Also referred to as
the Option Seller.
Initial Margin - The amount a futures market
participant must deposit into his margin
account at the time he places an order to buy
or sell a futures contract. Also referred to as
initial margin.
Par - The face value of a security. For
example, a bond selling at par is worth the
same dollar amount it was issued for or at
which it will be redeemed at maturity.
Position - A market commitment. A buyer of a
futures contract is said to have a long position,
which is an obligation to accept delivery and,
conversely, a seller of futures contracts is said
to have a short position, which is an obligation
to make delivery.
Position Day - According to the Chicago
Board of Trade rules, the first day in the
process of making or taking delivery of the
actual commodity on a futures contract. The
clearing firm representing the seller notifies
the Board of Trade Clearing Corporation that
its short customers want to deliver on a
futures contract.
Position Limit - The maximum number of
speculative futures contracts one can hold
as determined by the Commodity Futures
Trading Commission and/or the exchange
upon which the contract is traded. Also
referred to as trading limit.
33
 Position Trader - An approach to trading
in which the trader either buys or sells
contracts and holds them for an extended
period of time.
Price Limit - The maximum advance or
decline from the previous day's settlement
permitted for a contract in one trading session
by the rules of the exchange.
Price Limit Order - A customer order
that specifies the price at which a trade
can be executed.
Purchase and Sell Statement - A Statement
sent by a commission house to a customer
when his futures or options on futures position
ha changed, showing the number of contracts
bought or sold, the prices at which the
contracts were bought or sold, the gross
profit or loss, the commission charges, and
the net profit or loss on the transaction.
Put Option - An option that gives the option
buyer the right but not the obligation to sell (go
“short”) the underlying futures contract at the
strike price on or before the expiration date.
Range (Price) - The price span during a given
trading session, week, month, year, etc.
34
Scalper - A trader who trades for small,
short-term profits during the course of a
trading session, rarely carrying a position
overnight.
Security - Common or preferred stock;
a bond of a corporation, government, or
quasi- government body.
Settlement price or Settle - Usually, the
settle is the closing price or the simple average
of the closing range on any trading day. The
exchange clearinghouse determines a firm's
net gains or losses, margin requirements, and
the next day's price limits, based on each
futures and options contract settlement price.
Also referred to as settlement price.
Short - One who has sold futures contracts or
plans to purchase a cash commodity. Selling a
futures contracts.
Speculator - A market participant who tries
to profit from buying and selling futures and/or
options contracts by anticipating future price
movements. Speculators assume market
price risk and add liquidity and capital to the
futures markets.
Spot - Usually refers to a cash market price
for a physical commodity that is available for
immediate delivery.
Spot Month - The futures contract month
closest to expiration. Also referred to as
nearby delivery month.
Spread - The price difference between two
related markets or commodities.
Spreading - The simultaneous buying
and selling of two related markets in the
expectation that a profit will be made when
the position is offset. Examples include: buying
one futures contract and selling another
futures contract of the same commodity but
different delivery month; buying and selling the
same delivery month of the same commodity
on different futures exchanges; buying a given
delivery month of one futures market and
selling the same delivery month of a different,
but related, futures market.
Stock Index - An indicator used to measure
and report value changes in a selected group
of stocks. How a particular stock index tracks
the market depends on its composition the
sampling of stocks, the weighing of individual
stocks, and the method of averaging used to
establish an index.
Stock Market - A market in which shares of
stock are bought and sold.
Stop Order - An order to buy or sell when the
market reaches a specified point. A stop order
to buy becomes a market order when the
futures contract trades (or is bid) at or above
the stop price. A stop order to sell becomes a
market order when the futures contract trades
(or is offered) at or below the stop price.
Stop-Limit Order - A variation of a stop order
in which a trade must be executed at the
exact price or better. If the order cannot be
executed, it is held until the stated price or
better is reached again.
Strike Price - The price at which the futures
contract underlying a call or put option can be
purchased (if a call) or sold (if a put). Also
referred to as exercise price.
Supply, Law of - The relationship between
product supply and price. An increase in the
supply of a commodity usually has a negative
impact on prices. Conversely, a decrease in
the supply of a commodity usually has a
positive impact on prices. Note that demand
and other market factors may counter the
impact of a change in the supply.
Technical Analysis - Anticipating future price
movement using historical prices, trading
volume, open interest and other trading data
to study price patterns.
Tick - The smallest allowable increment of
price movement for a contract.
35
 Time Limit Order - A customer order that
designates the time during which it can be
executed.

Trading Limit - The maximum number of

speculative futures contracts one can hold
as determined by the Commodity Futures
Trading Commission and/or the exchange
upon which the contract is traded. Also
referred to as position limit.

Underlying Futures Contract - The specific

futures contract that is bought or sold by
exercising an option.

Volatility - A measurement of the change in

price over a given period. It is often expressed
as a percentage and computed as the
annualized standard deviation of the
percentage change in daily price.

Volume - The number of purchases or sales

of a commodity futures contract made during
a specific period of time, often the total
transactions for one trading day.

Writer - The person who sells an option in

return for a premium and is obligated to
perform when the holder exercises his right
under the option contract. Also referred to
as the option seller.

36
Business Development
141 W. Jackson Boulevard
Chicago, IL 60604-2994
312-341-7955 • fax: 312-341-3027

New York Office

One Exchange Plaza
55 Broadway, Suite 2602
New York NY 10006
212-943-0102 • fax: 212-943-0109

European Office
St. Michael’s House
1 George Yard
LONDON EC3V 9DH
United Kingdom
44-20-7929-0021 • fax: 44-20-7929-0558

Latin American Contact

52-55-5605-1136 • fax: 52-55-5605-4381

www.cbot.com

©2004 Board of Trade of the City of Chicago, Inc. All rights reserved.

The information herein is taken from sources believed to be reliable. However, it is intended for purposes of information and education only and is
not guaranteed by the Chicago Board of Trade as to accuracy, completeness, nor any trading results, and does not constitute trading advice or constitute a
solicitation of the purchase or sale of any futures or options. The Rules and Regulations of the Chicago Board of Trade should be consulted as the authoritative
source on all current contract specifications and regulations.

EM42-1R1—06.04.2500—04-03642
Action in the Marketplace
Contents

Why We Need Futures Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Birth of an Exchange ................................................... 3
Organization of a Futures Exchange:
A Close Look at the Chicago Board of Trade ............................. 8
The Purpose of Futures Markets ....................................... 10
The Trading Process: Mechanics of the Market . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Auction in Action ................................................. 18
Safeguarding the Marketplace ......................................... 22
About the Building and Its Trading Floors .............................. 25
For More Information ................................................. 27
Why We Need Futures Markets

T he price you pay for goods and services depends to a great extent on how well businesses handle
risk. By using futures markets effectively, businesses can minimize their risk, which, in turn, lowers
their cost of doing business. This price savings can benefit consumers, whether it’s lower food prices
or a better return on a pension or investment fund.

The need for efficient forward pricing and risk management mechanisms is the reason for the
tremendous growth in futures markets. Futures markets like the Chicago Board of Trade (CBOT®)
enable raw material producers and users, financial intermediaries, and international trading firms to
manage their price, interest rate, and exchange rate risk. And speculators throughout the world can
interpret the information that converges on exchange floors to enter the futures markets as investors.

Because of its ease of use and its many economic benefits, futures trading has expanded to include
numerous and varied markets throughout the world. The increased importance of futures can be seen in
the dramatic volume growth over the past decade. In the early 1970s, approximately 13 million futures
contracts were traded in the United States—most of which were agricultural. By 1999, trading volume
exploded to more than 593 million, with only 11 percent related to agricultural products.

Today, there are futures contracts for interest rates, stock indexes, manufactured and processed
products, nonstorable commodities, precious metals, as well as foreign currencies and foreign
bonds. And the number of proposals for new contracts continues to grow.

Reading through this brochure you will gain insight not only into the CBOT and the futures industry,
but also the global marketplace. Topics covered include: why the CBOT was created, how the exchange
is run, the mechanics of how contracts are traded, the economic purpose behind futures markets, and
the ways futures markets are regulated.

2
Birth of an Exchange

T he history of futures trading began on the Midwestern frontier in the early 1800s. It was tied
closely to the development of commerce in Chicago and to the grain trade in the Midwest. Chicago’s
strategic location, at the base of the Great Lakes and close to the Midwest’s fertile farmlands,
contributed to the city’s rapid growth and development as a grain terminal. Problems of supply and
demand, transportation, and storage, however, led to a chaotic marketing situation, which resulted in
the logical development of futures markets.

Grain trade expanded, and in 1848, 82 merchants formed a centralized marketplace—the Chicago
Board of Trade. Their purpose was to promote commerce in the city by providing a place where buyers
and sellers could meet to exchange commodities. Growing use of contracts “to arrive,” which specified
delivery of a particular commodity at a predetermined price and date, made the CBOT increasingly
popular as a centralized marketplace.

These early forward contracts in corn were first used by river merchants. They received farmers’
corn in late fall and early winter and needed to ship it to processors. But shipment required two
conditions—a crop with a low moisture content, so it would not freeze during transport, and a river
free of ice to make transport possible. Often the corn needed to be stored all winter.

To reduce the price risk of winter storage, these river merchants travelled to Chicago, where they
entered into contracts with processors for the spring delivery of grain at an agreed-upon price. In
this way, they ensured themselves a buyer and a price for grain. March 13, 1851, marks the earliest
recorded forward contract—3,000 bushels of corn to be delivered in June.

Cash forward contracts had their drawbacks. They were not standardized according to quality or
delivery time, and merchants and traders did not always fulfill their forward commitments. In 1865, the
Chicago Board of Trade formalized grain trading by developing standardized agreements called futures
contracts. Unlike forwards, futures contracts standardized the traded commodity’s quality, quantity, and
time and location of delivery. The only variable was price—discovered through an auctionlike process
on the trading floor.

Standardized Agreements: Futures Contracts

Because futures contracts were standardized, buyers and sellers were able to exchange one contract
for another and actually offset their obligation to deliver the underlying cash commodity. (Offset in the
futures market means taking a futures position opposite and equal to one’s initial futures transaction.
For example, buying a contract if previously one was sold.)

3
Standardized contract terms led agricultural firms to increasingly use futures markets. Grain
merchandisers, processors, and other agricultural companies found that by trading futures contracts
they were able to protect themselves from erratic price movements in the commodities they traded.

Speculators, on the other hand, were attracted to the futures market’s profit potential. By purchasing
and selling grain that may not have traded otherwise, speculators absorbed the price risks, made the
markets more liquid, and minimized price fluctuations by placing incremental prices between the wide
bid and offer spreads made by the commodity traders.

The Chicago Board of Trade, in the same year it introduced futures contracts, initiated a margining
system to eliminate the problems of buyers and sellers not fulfilling their contracts. The margining
system required traders to deposit funds with the exchange or an exchange representative to guarantee
contract performance. Although early records were lost in the Great Chicago Fire of 1871, it has been
quite accurately established that by 1865 most basic principles of futures trading were in place. But
no one could have guessed how this infant industry would change and develop in the next century
and beyond.

Growth in futures trading increased in the late 19th and early 20th centuries as more and more
businesses adopted futures strategies into their business plans. Still, the most dramatic growth in the
futures industry was yet to come—in the form of financial instrument futures.

Meeting the Needs of the Times—Financial Futures

The development of financial futures markets resulted from a changing world economy following
World War II. Greater financial interdependence among nations and sharp increases in the amount of
government debt characterized the economic environment.

The fixed exchange rate between U.S. and West European currencies, established after World War II,
began to unravel in the early 1970s. Floating currencies contributed to the volatility of not only money,
but other financial assets—such as Treasury bonds and Treasury notes—as well. This, along with the
explosion of U.S. government-issued debt, moved the world economy away from a relatively stable
interest rate environment to one that was much more volatile. Interest rates became totally unhinged in
1979, when Fed chairman Paul Volcker announced that they would be allowed to float.

4
To meet the demand of this new economic environment, the CBOT expanded its contract offerings,
giving financial institutions the opportunity to manage price risks. The first futures contracts in
financial instruments were launched with the Chicago Board of Trade’s Government National
Mortgage Association (GNMA) mortgage-backed certificates and the Chicago Mercantile
Exchange’s foreign currency futures in the 1970s.

While no longer traded, GNMAs paved the way for other financial contracts, most notably the U.S.
Treasury Bond futures contract, which quickly grew to be one of the world’s most actively traded
futures contracts. This contract’s success led to the introduction of other financial contracts, including
U.S. Treasury Note futures, 30-Day Fed Funds futures, Municipal Bond Index futures, and Agency
Note contracts.

Launched on March 15, 2000, CBOT 10-Year Agency Note futures and options contracts are based on
non-callable Fannie Mae® Benchmark NotesSM and Freddie Mac Reference NotesSM. These contracts
provide additional trading and spreading opportunities in a market that boasts average daily volume of
more than $6 billion. The success of the 10-year agency note contract has led the CBOT to plan to
launch a 5-year agency note contract as well.

CBOT® Dow Jones Industrial AverageSM Products

On October 6, 1997, the exchange launched CBOT® Dow Jones Industrial AverageSM futures and
futures options. These contracts, based on the world’s most recognized stock index, give retail and
institutional investors alike a new world of financial market opportunities.

CBOT® DJIASM futures recently surpassed the 40,000 daily volume milestone after only two years
and six months of trading. By comparison, the CBOT’s benchmark Treasury Bond futures contract
reached the 40,000 mark two years and 10 months after its August 1977 launch. The CBOT plans to
list contracts on three additional Dow Jones AveragesSM—Transportation, Utilities, and Composite—
to complement the CBOT® DJIASM contracts that are currently traded.

A New Marketing Alternative: Options on Futures

By 1982, another market innovation—options on futures—was instituted. In contrast to futures,
options on futures allow investors and risk managers to define risk and limit it to the cost of a premium
paid for the right to buy or sell a futures contract. At the same time, options provide the buyer with
unlimited profit potential.

The CBOT’s first option contract began trading in October 1982—U.S. Treasury Bond options.
Its success opened the way for options on agricultural and other financial futures, beginning with

5
soybean and corn options in 1984 and 1985, respectively. Now almost every CBOT futures contract
has a corresponding option contract.

Perhaps one of the most remarkable things about financial instrument futures and options is their
phenomenal growth. While it took decades for agricultural markets to develop, the financial futures
markets sprang up in less than 15 years. Trading volume in CBOT financial contracts soared from a
mere 20,125, when they were first introduced in 1975, to more than 191 million in 1999.

Globalization
The tremendous volume growth in CBOT financial contracts represents not only an increase in the
use of CBOT markets by U.S. firms, but also by international businesses that need efficient and
cost-effective ways to hedge their price risks. The CBOT has worked extensively to appeal to
international market users with the opening of a European office in London in 1986 and with the
opening of an Asia-Pacific office recently relocated to Sydney.

Project A®, an electronic order-entry and matching

system, further expanded worldwide access
to CBOT products. Financial products began
trading electronically in October 1994.
This afternoon session started after
the open outcry markets closed and
gave traders the opportunity to react
to late-breaking news. Little more
than a year later, Project A added an
overnight session and increased its
product offerings to include
agricultural futures and options.
Today, Project A remains the largest
U.S. electronic derivatives trading
platform with more than 500
workstations worldwide.

CBOT/Eurex Alliance, L.L.C.

On October 1, 1999, Eurex and the CBOT signed
final agreements to create an alliance and joint
venture company that will operate a single global electronic
trading system. This alliance will create the world’s most advanced

6
trading network by providing members and customers with the opportunity to trade the most active
futures and options products in the world from a single screen.

As the world business environment continues to change, the CBOT will continue to introduce new
products and instruments to better meet marketplace demands.

On the Internet
The CBOT has remained at the forefront of the futures industry by adapting to new technologies. The
Internet is a case in point. The World Wide Web quickly caught the world’s attention, and the CBOT
saw it as an ideal way to reach the public. It established a web site that offers information for everyone,
from beginners who have never encountered futures and options to experienced traders who use these
products every day.

The site splits its information among several different sections where surfers can learn about different
products and news affecting the markets. For instance, the section devoted to agricultural futures
provides contract specifications for corn, soybeans, and all other agricultural products traded at the
CBOT. But you also will find out why people trade these contracts and how they use them in their
trading strategies. The same holds true for financial products, such as bonds, and for environmental
products as well.

The CBOT web site also provides recent press releases, futures industry news, background on the
exchange’s leaders, such as the president and the chairman of the board, and methods for obtaining
literature that the exchange publishes and distributes. Other items are continuously updated to provide
details about the most current exchange events.

7
Organization of a Futures Exchange:
A Close Look at the Chicago Board of Trade

W hile all U.S. futures exchanges share some general characteristics, no two are exactly alike.
Many differences have to do with their historical development. The CBOT is organized as a not-for-
profit membership association. It has several types of memberships, each granting access to all or some
of the contract markets designated at the exchange. Every membership is owned by an individual;
however, companies, corporations, partnerships, and cooperatives may be registered for certain
membership privileges.

A membership is sold through a bid-and-ask system. An applicant must meet certain financial
requirements and have two exchange members as sponsors. The exchange conducts a thorough
investigation of each member applicant. It focuses on the applicant’s credit standing, financial
responsibility, character, and integrity.

There are approximately 1,400 full members eligible to trade any CBOT contract. In addition, a
number of associate memberships and membership interests offer holders limited groups of products to
trade. For example, a CBOT associate membership allows an individual to trade financial instrument
futures and other designated markets. IDEMs may trade all futures contracts in the index, debt, and
energy markets category (gold, municipal bond index, and stock index futures, etc.); COMs may trade
all option contracts listed in the commodity option market category.

The self-governing association has a board of directors that includes an elected chairman, 2 vice
chairmen, 18 member directors, 5 public directors, and the exchange president.

Currently, a few key committees, composed of exchange members, advise and assist the board in
developing policies for a variety of exchange activities. CBOT staff carries out these policies under
the direction of an executive staff headed by an appointed president.

Affiliation
The Chicago Board of Trade also has an affiliate—the MidAmerica Commodity Exchange (MidAm).
The affiliation was approved on March 24, 1986, by the Commodity Futures Trading Commission
(CFTC), the independent regulatory agency of the federal government that administers the Commodity
Exchange Act. Under this affiliation, the MidAm remains a separate legal entity and a separate
exchange, with the CBOT as its sole voting and equity member. Also, the CBOT staff provides
administration and support services for the MidAm.

8
The Purpose of Futures Markets

F utures exchanges, no matter how they are organized and run, exist because they provide two vital
economic functions—risk transfer and price discovery. Futures markets make it possible for those who
want to manage price risk—hedgers—to transfer some or all of that risk to those who are willing to
accept it—speculators.

Price-Risk Transfer: Hedging

A primary economic function of futures markets is hedging. Hedging is buying and selling futures
contracts to offset the risks of changing cash market prices. This risk-transfer mechanism has made
futures contracts virtually indispensable to companies and financial institutions around the world.

Hedgers either own or plan to own a cash commodity—corn, soybeans, wheat, U.S. Treasury bonds,
notes, bills, etc.—and are concerned that the commodity’s price may change before they buy or sell it.
Almost anyone who seeks protection against unwanted price changes in the cash markets can use the
futures markets for hedging—farmers, grain elevator operators, merchandisers, producers, exporters,
bankers, bond dealers, insurance companies, money managers, pension fund managers, portfolio
managers, thrifts, manufacturers, and others.

Price risk exists throughout business. In agriculture, for instance, a prolonged drought may affect a
farmer’s crop supply as well as the income he receives. The drought also may affect the price paid
by grain companies for corn, wheat, soybeans, and oats. Those prices, in turn, may directly impact
consumer prices for cereals, cooking oils, salad dressings, bread, meat, and poultry.

For manufacturers, diminished supply—caused by an extended labor strike or embargo of a raw

material—could result in a sharp price increase of a specific manufactured product. These economic
factors may directly affect the price manufacturers and consumers pay for an array of commodities,
ranging from gasoline and home heating oil to jewelry. For a bank, savings and loan, or other financial
institution, an interest rate change affects the rate the institution pays on certificates of deposit. This,
in turn, influences its lending rates.

There is no escaping the varying degrees of price fluctuation, i.e., risk, in every sector of today’s
economy. Hedging in the futures markets minimizes the impact of these undesirable price changes.

Take the example of a contractor who wants to build a development with 20 houses. He decides to sell
each house before beginning construction to remove the risk of falling real estate values, which would
cause him to lose money. Of course, by preselling, he forfeits the benefits from any appreciation in
land value as well. Instead, he locks in a price for his development and removes any risk, good or bad,
associated with real estate market fluctuations.

10
The buyers of those houses do much the same thing. By locking in their price, they are protected from
rising real estate prices, but they also lose the ability to buy the house more cheaply if prices fall during
the construction process. Both the home buyers and the contractor used hedging to buy the price stabil-
ity they wanted.

For a futures example, suppose a soybean processor agrees to sell soybean oil to a food manufacturer
six months from now. Both agree on a price today even though the oil will not be delivered for six
months. The soybean processor does not yet own the soybeans she will eventually process into oil, but
she is concerned that soybean prices may rise during the next six months, causing her to lose money.

To hedge against rising prices, the soybean processor buys soybean futures contracts calling for
the delivery of the soybeans in six months. When five and a half months have passed, the soybean
processor purchases the soybeans in the cash market and, as feared, prices have risen. Because she
hedged in the futures market, however, the soybean processor can now sell her futures contracts at a
profit, since futures prices also have increased. She uses the gain in the futures contract to offset the
higher cost of soybeans, protecting her profit on the sale of the soybean oil.

Cash and futures prices tend to move in a roughly parallel pattern since they react to the same
supply/demand factors. In general, hedgers are most interested in the difference between the cash
price and futures price—the basis—which is more stable and predictable than the actual cash and
futures price levels.

Financial futures provide the same type of hedges. Suppose a major financial institution holds a
significant amount of long-term U.S. Treasury bonds. The firm’s financial officers are concerned that
interest rates may rise in the near term, causing a decline in the value of the bonds. Knowing there is a
substantial risk in holding this unhedged cash position, they elect to sell U.S. Treasury bond futures.

A month later, as expected, interest rates rise and bond prices decline. The firm lifts its hedge, buying
back the futures it originally sold, and earns a profit. The firm succeeded in protecting the value of the
cash bonds, as the profit from the hedge offsets the decline in the Treasury bonds’ cash market value.
Of course, the market does not always move as expected. A hedger accepts that possibility, sometimes
forfeiting the opportunity to make a gain in the market. It is more important to establish and achieve
market objectives, like eliminating price risk.

11
Price Discovery
As the needs and expectations of hedgers and speculators converge on the exchange floor, trades are
made and price information is provided to the world. This price information is used as a benchmark to
determine the value of a particular commodity or financial instrument on a given day and time. The
benefits of futures exchanges reach every sector of the world where changing market conditions create
economic risk.

Speculators Add Liquidity and Capital to the Markets

Speculators fulfill several vital economic functions, as they facilitate the marketing and trade of basic
commodities and financial instruments. Speculators do not create risk; they assume it in the hope of
making a profit.

In a market without these risk-takers it would be difficult, if not impossible, for hedgers to agree on a
price because the sellers (or short hedgers) want the highest possible price, while the buyers (or long
hedgers) want the lowest possible price. Finding offsetting hedgers would not be very cost-efficient.
Sellers would have to accept the bid regardless of how low and buyers would have to accept offers
regardless of how high. Speculators bridge the gap between bids and offers, thus making the market
more cost-efficient.

When speculators enter the marketplace, the number of ready buyers and sellers increases and
hedgers are no longer limited by the hedging needs of others. In addition to assuming risk and
providing liquidity and capital, speculators help ensure the stability of the market.

Speculators trade in the futures markets to profit from price fluctuations. Many external factors affect
the price of a commodity or financial instrument. The price of grain, for example, changes along with
supply and demand. Plentiful supplies at harvest usually mean a lower price for grain. Higher prices
may result from such things as adverse weather conditions during the growing season or an unexpected
increase in export demand. Financial instruments fluctuate in price due to interest rate changes and
various economic and political factors.

When speculating in futures markets, both profits and losses are possible—just as in owning the
actual cash commodity. But speculators rarely have an interest in owning the cash commodity or
financial instrument that underlies a futures contract. They buy contracts expecting prices to increase,
hoping to later make an offsetting sale at a higher price and, thus, a profit. They sell contracts expect-
ing prices to fall, hoping to later make an offsetting purchase at a lower price and, again, a profit.
A speculator can enter the market with either a purchase or sale—a unique aspect of futures markets.
His market expectations ultimately drive his decision.

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The speculator’s profit potential is proportional to the amount of risk he assumes and his skill in
forecasting price movement. Potential gains and losses are as great for the selling (short) speculator as
for the buying (long) speculator. Whether long or short, speculators can offset their positions and never
have to make or take delivery of the actual commodity.

Types of Speculators
Speculators can be classified by their trading methods. A position trader initiates a futures or options
position and holds it over a period of days, weeks, or months. A day trader holds market positions only
during the course of a trading session and rarely carries a position overnight. Most day traders are
exchange members who execute their transactions in the trading pits. A scalper trades only for himself
in the pits. He trades in minimum fluctuations, taking small profits and losses on a heavy volume of
trades. Like a day trader, a scalper rarely holds positions overnight.

Finally, speculators also may be spreaders. Spreaders trade the shifting price relationships between
two or more different futures contracts. Examples include: different delivery months of the same
commodity, the prices of the same commodity on different exchanges, products and their by-products,
and different but related commodities.

Hedging Example
Hedging in the futures market is a two-step process. Depending upon the hedger’s cash market
situation, he either will buy or sell futures first. For instance, if he is going to buy a commodity in
the cash market at a later time, his first step is to buy futures contracts. Or if he is going to sell a cash
commodity at a later time, his first step is to sell futures contracts.

The second step occurs when the cash market transaction takes place. At this time, the futures position
is no longer needed for price protection and should be offset (closed out). If the hedger was initially
long (long hedge), he would offset his position by selling the contract. If he was initially short (short
hedge), he would buy back the futures contract. Both the opening and closing positions must be for the
same commodity, number of contracts, and delivery month.

Example:
Assume in June a farmer expects to harvest at least 10,000 bushels of soybeans during September. By
hedging, he can lock in a price for his soybeans in June and protect himself against the possibility of
falling prices.

At the time, the cash price for new-crop soybeans is $6 and the futures price of November soybean
futures is $6.25. The delivery month of November marks the harvest of new-crop soybeans.

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The farmer short hedges his crop by selling two November soybean futures contracts (5,000 bushels
per contract) at $6.25. (Typically, farmers do not hedge 100 percent of their expected production,
because the exact number of bushels produced is unknown until harvest. In this scenario, the producer
expects to produce more than 10,000 bushels of soybeans.)

By the beginning of September, cash and futures prices have fallen. When the farmer sells his cash
beans to the local elevator for $5.72 a bushel, he lifts his hedge by purchasing November soybean
futures at $5.95. The 30-cent gain in the futures market offsets the lower price he receives for his
soybeans in the cash market.

Cash Futures
Jun
Price for new-crop Sells 2 Nov Soybean contracts
soybeans at $6.00/bu at $6.25/bu
Sep
Sells 10,000 bu soybeans Buys 2 Nov soybean contracts
at $5.72/bu at $5.95/bu
Result
Cash sale price $5.72/bu
Futures gain .30/bu
Net selling price $6.02/bu

Had the farmer not hedged, he would have received only $5.72 a bushel for his soybeans—30 cents
less than he did.

Speculating Example
Depending on a speculator’s expectations of future price movement, she either will buy or sell futures
as her first market position.

A speculator would go long contracts when expecting prices to rise, hoping to later make an offsetting
sale at a higher price and, thus, a profit. Or a speculator would go short contracts when expecting
prices to fall, hoping to later make an offsetting purchase at a lower price and, again, a profit.

14
The speculator will offset her opening position before the futures contract expires by taking a second
position opposite the opening transaction. Both opening and closing positions must be for the same
commodity, number of contracts, and delivery month.

Example:
Bond futures are trading at 92-00, and a trader believes that bond prices will rise (and interest rates will
fall). Assume she goes long one $50,000 MidAm T-bond contract. Subsequently, bond prices rise to
94-00. She offsets the original long position by selling—a profit of 2-00 points, or $1,000.

Long one contract at 92-00, or $46,000

Short one contract at 94-00, or $47,000
Profit $1,000

If a speculator anticipates an increase in interest rates, she also expects bond futures to fall. A short
futures position may be used to take advantage of a falling bond market.

For example: Bond futures are trading at 92-00. The trader goes short in anticipation of falling bond
prices. Prices drop to 89-00, and she offsets the original position to realize a 3-00 point gain, or
$1,500 profit.

Short one contract at 92-00, or $46,000

Long one contract at 89-00, or $44,500
Profit $1,500

The speculator made a profit by trading bond futures because her price expectations were correct.
The opposite is also possible. If the speculator had been wrong, her position could have resulted in a
loss. That is why it is important to keep a close watch on the market, to develop a trading plan before
initiating a futures position, and to understand the risks involved in trading.

15
The Trading Process: Mechanics of the Market

B uyers and sellers meet in the pits of futures exchanges, where open outcry is used to discover a
price for specific futures and options contracts. At first glance, this open outcry system appears chaotic.

In reality, the whole trading process has gone through almost a century and a half of refinement—
whether it’s a customer placing an order through a commission house or the dissemination of price
information from the trading floor. By taking a few minutes to look at the trading process, you’ll
discover just how orderly the system really is.

The Customer and the Commission Merchant

Commission houses handle most customer operations through commodity representatives. A number
of terms are used to describe commission houses, i.e., wire houses, brokerage houses, and futures
commission merchants (FCMs). Some firms specialize in commercial hedging accounts; others
concentrate on public speculative commodity trading.

A commission house becomes a registered member firm of the CBOT to trade or handle accounts in
CBOT markets. Regardless of the firm’s name, size, and scope, its basic function is to represent the
interests of those in the market who do not hold seats on the commodity exchange. The commission
house places orders, collects and segregates margin monies, provides basic accounting records, and
counsels customers in their trading programs in return for commission fees.

Opening a Trading Account

The trading process begins when a prospective customer discusses his financial goals with a registered
commodity representative. At that time, the risks associated with trading futures and options are
explained to the customer. An account can be opened once the customer understands the financial risks
and meets certain financial requirements. The customer also signs several legal documents concerning
his and the firm’s responsibilities regarding the account.

There are various types of futures and options accounts: individual accounts in which trading decisions
are made by the customers, joint accounts in which all parties have input on trading decisions, and dis-
cretionary accounts (also known as controlled or managed accounts) in which the customer authorizes
another person to make all trading decisions. For all accounts, written confirmations of all transactions
must be sent to the customer.

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Margins
When a customer places an order, she must post a performance bond margin—a financial guarantee
required of both buyers and sellers to ensure they fulfill the obligation of the futures contract. Futures
exchanges set minimum margin requirements, usually between 5 and 18 percent of a contract’s face
value, but brokerage firms can require a larger deposit.

The initial amount a market participant must deposit is called initial margin. The margin is debited or
credited daily based on the close of that day’s trading session (referred to as marking to the market)
with respect to the customer’s open position. A customer must maintain a set minimum margin known
as maintenance margin in her account. When the debits from a market loss reduce the funds in the cus-
tomer’s account below the maintenance level, the broker calls the customer for additional funds to
restore the account to the initial margin level. This request for additional money is called a margin call.
Margin in excess of the required amount is available for withdrawal by the customer.

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The Auction in Action

W hile all market participants have indirect access to the floor through their brokers, only exchange
members have the privilege of trading on the floor. Since many people are intrigued by the trading
process, the mechanics of what occurs on the floor deserve a closer examination.

The Trading Floor

The trading floor is specifically designed for futures trading. Trading at the CBOT is done in pits—
raised octagonal platforms with steps descending toward the inside. The configuration permits all
buyers and sellers to see each other. Traders stand in specific areas in the pits according to the delivery
month in which they trade.

On each business day, trading is officially opened by the clanging of a large gong, a historic instrument
that has been in use for more than 80 years. No futures trade can be made before the gong booms out
the official opening signal, and none can be made after it sounds the closing.

During trading hours, the trading floor is usually a scene of feverish activity. Computers and monitors
on the trading floor relay current information from the major securities exchanges, while the major
news wire services provide a constant flow of current information—including weather conditions in
pertinent crop-growing regions and market reports from other commodity exchanges.

Hand Signals
Most visitors seeing the trading floor for the first time ask, “What do those hand signals mean?” The
Rules and Regulations of the CBOT require pit traders to use open outcry in buying and selling. In
addition, they use standard hand signals to clarify their verbal bids and offers, particularly when trading
is fairly active. Hand position tells whether a trader is buying or selling; his palm faces inward if he is
buying, and his palm faces outward if he is selling. With his arms extended, a trader uses finger signals
to indicate his bid or offer.

Hand signals also indicate the number of contracts a trader wishes to buy or sell. For grains, each
finger held in a vertical position indicates 5,000 bushels, or one contract.

Bids and offers are made by open outcry so that any trader in the pit who wishes to take the opposite
side of the trade may do so. An important verbal distinction also shows if a trader wants to buy or sell.
Buyers call out price first and then quantity; sellers call out quantity first, then price.

18
When a trade is made, each trader writes the completed transaction on a trading card or multipart order
form. For instance, a trading card for T-bond futures must include the contract month, the price, the
trader’s initials, the other trader’s identity, the opposite side’s clearing firm, and a code indicating time.
These trading cards constitute original records, and the essential data from them is transferred to the
buyer’s and seller’s clearing firms.

Order Routing System

Customer service has always been a priority at the CBOT. To that end, a major effort to streamline the
order flow in both the Financial and Agricultural Complexes resulted in the Order Routing System
(ORS).

ORS provides electronic order entry to either the FCM's centralized desk off the floor or to its booth on
the trading floor. These orders, in turn, can be sent directly to an electronic device that brokers have in
the pit, an alternative to either flashing or running a paper ticket into the pit.

Once received, the broker executes the trade in the open outcry marketplace. The broker or his clerk
then electronically confirms the trade with the FCM, immediately providing the firm with the order’s
price and quantity.

In February 2000, the Chicago Board of Trade introduced OrderDirectTM API, an exclusive connection
between FCM order management systems and the primary CBOT routing network for the trading floor.
Functioning as a communications link, OrderDirect API enables brokerage firms to provide quick
customer trade confirmations. Through the Internet, order entry turnaround times on market orders
are often less than one minute.

Trading Badges
Because all trades must be recorded, traders must be able to identify each other. All traders wear a
badge, the color of which indicates the trading privileges they may exercise. Yellow badges identify
full members; red badges, associate members; green badges, COM members; and black badges, IDEM
members. Each badge bears a trading acronym of no more that three letters by which traders record
their trades. No two acronyms are the same. The letters usually represent a trader’s initials, but any
letters may be chosen that are not already being used by another trader.

Trading Jackets
Exchange rules dictate that trading floor personnel must wear jackets and ties. Business attire is not
tailored with the physical demands of the trading pit in mind. So the trading jacket was developed as a
lightweight, loose-fitting alternative in which a trader may move more freely.

19
Member brokerage firms maintain large floor staffs. To find each other in the trading floor crowd,
every brokerage staff wears the same color trading jackets, which sometimes bear the company name
or logo—like sports teams with uniforms.

Independent traders often wear trading jackets in colors of their own choosing, or they might wear the
same color jacket as the member firm that clears their trades.

Price Quotations
Electronic wall boards—located on the CBOT’s trading floor—flash price changes during trading.
A market data quotation network then disseminates these to the outside world. For open outcry pit
trading, quantities associated with last prices are not shown on the market data feed. Instead, the Board
of Trade Clearing Corporation compiles trading day volume figures to be released officially the next
day, primarily via the CBOT’s Market Data Information Department and market quotation network.

Price quote dissemination starts in the pits and works like this. From a raised position above each pit—
the reporter’s perch—CBOT market reporters use laptop computers to constantly input changing prices
into an electronic price reporting system. This system immediately updates both the wallboards on the
CBOT’s trading floors and a mainframe database, while transmitting the data over the CBOT market
data network to quotation vendors, who redistribute it to world-wide users. (Typically, these users see
CBOT market data on quote vendor terminal displays or their own PC screens.) The last, or most
current, price posted constitutes the market until a different price is posted.

Newspapers vary in the manner in which they print quotations. The Wall Street Journal follows
commonplace procedures and provides a key to reading most commodity columns.

For instance, the months listed are the time of maturity, or delivery. The word Open, signifies either
the price of the day’s first contract traded or the price based on an opening range. The next column is
the High, which designates the highest price of the day. Following is the Low price. The Settle column
refers to the settlement price, which is the closing trade. If there is a closing range, the Board of Trade
Clearing Corporation determines a settlement price, usually the midpoint of the range. The Change
column refers to the change from the previous day’s settlement price. The next two columns give
lifetime high and low prices of that particular contract. Open Interest is the final column, and it gives
the number of contracts that have not yet been offset by opposite futures contracts or fulfilled by
delivery of the commodity.

20
Safeguarding the Marketplace

P rotecting the interests of all participants in the futures market is the responsibility of all exchange
and industry members, as well as federal regulators. Working in concert, they ensure an honest, open
trading environment for all market participants.

There is a long history of self-regulation by U.S. futures markets that dates as far back as the
mid-1800s and predates both state and federal regulations.

The CBOT’s extensive rules and regulations are designed to support competitive, efficient, liquid
markets. The CBOT continuously scrutinizes these rules and regulations and periodically amends them
to reflect the needs of market users.

Making sure that these trading rules and regulations are followed is the responsibility of the CBOT’s
Office of Investigations and Audits (OIA). OIA staff members work to prevent trading irregularities
and investigate possible violations of exchange regulations. The activities of the OIA Department
include daily on-site surveillance of trading activity, continuous monitoring with state-of-the-art
technology of member firms’ risk exposure, and auditing members firms’ financial conditions, as
well as reviewing firms’ trading practices and customer complaints.

In particular, OIA conducts surveillance programs, such as the Computerized Trade Reconstruction
(CTR) system. Developed by the CBOT in 1986 and enhanced in 1994, CTR (now called Advanced
CTR) is able to pinpoint the traders, the contract, the quantity, the price, and can input the time of
execution for any trade. A program within the system called SMART®—Sophisticated Markets
Analysis and Research Technology, developed in 1996—is able to reconstruct the trading activities
of members and member firms to detect patterns of conduct that might indicate rule violations.

Board of Trade Clearing Corporation

U.S. commodity exchanges use clearing operations as another mechanism to uphold the integrity of
futures markets. The Board of Trade Clearing Corporation (BOTCC®) is an independent corporation
that settles all trades made at the CBOT and MidAm. The BOTCC acts as a guarantor to clearing
members for trades it maintains, reconciles all clearing member firm accounts each day to ensure that
all gains have been credited and all losses have been collected, and sets and adjusts clearing member
firm margins for changing market conditions.

22
Throughout the CBOT trading session, each trader turns endorsed orders of his completed trades over
to his clearing firm. There are approximately 130 member firms of the BOTCC. The BOTCC settles
each member firm’s account at the end of the trading day, balancing quantities of commodities bought
with those sold. Traders are financially responsible to their clearing firms, and the BOTCC guarantees
performance of all contracts between itself and its clearing members.

Upon clearance of the trade, the BOTCC substitutes itself as the opposite party of the transaction.
It interposes itself as the buyer to every clearing member seller and the seller to every clearing member
buyer and becomes, in effect, a party to every clearing member transaction. What was initially a sale by
clearing member A to clearing member B becomes a sale by A to the BOTCC. B’s purchase becomes a
transaction with the BOTCC rather than with A. Because of this substitution of parties, it is no longer
necessary for the buyer (or seller) to find the original seller (or buyer) when he wishes to offset his
position. He merely executes an equal and opposite transaction, usually with an entirely different party,
and ends up with a net zero position.

One of the most important financial safeguards in ensuring performance on futures contracts is the
clearing original margin, which clearing member firms must maintain against their position in each
commodity. These margins are set by the BOTCC risk committee and governors. They are separate
from the margins that individual holders of commodities accounts are required to deposit with the
brokers by exchange regulation.

The BOTCC settles its accounts daily. As closing or settlement prices change—causing variations in
the value of all outstanding futures positions—the BOTCC collects from those who have lost money
and credits the funds immediately to the accounts of those who have gained. Thus, before each day’s
trading begins, all of the previous day’s losses have been collected and all gains have been paid. In this
way, the BOTCC maintains very tight control over margins as prices fluctuate. It ensures that sufficient
margin money will be on deposit at all times to guarantee the performance of all CBOT contracts.

The success of this system is obvious. Since its start in 1925, no customer within or outside of the
exchange has lost money due to default on a futures position.

Industry and Federal Regulations

Besides exchange efforts to uphold the integrity of the futures markets, there are also industry and
federal regulations in place.

23
The U.S. commodity industry operates under an extensive regulatory umbrella, whose beginnings date
back to 1924. The Commodity Futures Trading Commission (CFTC), established under the 1974
amendments to the Commodity Exchange Act (CEA), has far-reaching authority over a wide variety of
commodity industry activities. The National Futures Association (NFA) provides an additional layer of
self-regulation over the nonexchange industry.

Congress created the CFTC in 1974 as an independent agency responsible for administering the federal
commodities law, which focuses primarily on customer protection and market integrity. Subject to
certain express limitations, the CFTC has exclusive jurisdiction over transactions in futures, options,
and leverage contracts involving commodities and options contracts on physical commodities. In 1982,
amendments to the CEA specified the CFTC’s jurisdiction over futures and options involving a group
or index of securities under the Shad/Johnson Accord.

The CFTC’s powers reach all persons involved in domestic commodity trading, including, but not
limited to, exchanges, exchange members, and FCMs. The CFTC’s primary regulatory tools include
the authority to approve or disapprove contract market designations and contract market rules,
rule-making authority, and the ability to bring enforcement actions. Further, the CFTC provided a
reparation procedure for investors to assert claims based on violations of federal commodities law.

The NFA was registered by the CFTC as a “futures association” under CEA Section 17 in September
1981. An industrywide, industry-supported, self-regulatory organization for futures and options on
futures markets, the NFA is mandated under the CEA to adopt and implement a comprehensive
self-regulatory program for the futures industry, with its primary focus on persons and firms that are
not members of a commodity exchange.

The NFA’s primary responsibilities are to enforce ethical standards and customer protection rules,
screen futures professionals for membership, audit and monitor professionals for financial and general
compliance rules, and provide for arbitration of futures-related disputes.

The NFA directs educational efforts at both members and the investing public. Members are assisted
in complying with NFA rules and CFTC registration. For the investing public, the NFA produces
materials concerning such topics as futures trading fundamentals and fraud identification.

It is through the individual exchanges and industry and federal actions that the financial interests of all
market participants are protected.

24
About the Building and Its Trading Floors

T he Chicago Board of Trade building stands authoritatively over the city’s financial district at
LaSalle and Jackson, the exchange’s home since 1930. Atop the structure sits a 31-foot statue of Ceres,
the Roman goddess of grain and harvest.

Designed by the noted architectural firm of Holabird and Root, the original CBOT structure is
classically art deco and a significant element in the cityscape. Accorded status as a Chicago
landmark in 1967, the building creates a dramatic focus at the southern end of Chicago’s LaSalle
Street “canyon.”

The CBOT eventually outgrew its original structure and, in 1982, undertook the first of two major
expansions to increase trading floor capacity. The 1982 annex added a 32,000 square-foot trading
facility as well as office space to the building’s south end. The building addition included an atrium,
rising from the 12th floor to the 23rd, that is bound by three “glass walls” and a limestone wall
from the original 1930 structure.

In 1997, the CBOT unveiled a new 60,000 square-foot trading floor, making it the world’s largest open
outcry facility at 92,000 square feet. State-of-the-art technology provides members with the most
sophisticated order-routing system for more efficient trading.

The Board of Trade Visitor Center

Located on the CBOT’s fifth floor, the Visitor Center features an observation gallery overlooking the
agricultural trading floor. From this excellent vantage point visitors clearly see the entire trading
process—phone clerks, runners, brokers, and price boards. An observation gallery is also available
providing visitors with a firsthand view of trading on the CBOT’s financial floor.

Adjacent to the agricultural gallery, a historical mini-museum displays artifacts and photos that trace
the evolution of commodities trading, from its beginnings to the present day.

Education is a key function of the Visitor Center, where guests listen to an explanation of the markets
while viewing the trading activity. The Visitor Center also presents the CBOT’s award-winning film,
“A Window on Futures.” In addition to presentations in English, audio and videotaped market
explanations are available in 11 languages, including Japanese, Korean, Chinese, French, German,
Spanish, Portuguese, Italian, Russian, Polish, and Danish. Informational brochures also have been
translated into foreign languages and are provided to Visitor Center guests.

25
The Visitor Center is open Monday through Friday from 8:00 a.m. to 2:00 p.m., except on legal
holidays. Reservations are required for groups of more than 10. The minimum age required for group
members is 16. Call 312-435-3590 or 312-435-3625 for additional information or to make reservations.
There is no admission fee.

If you have occasion to be in Chicago’s financial district, please take the time to stop by the exchange.
This gallery truly offers a firsthand opportunity to see the “action in the marketplace.”

26
For More Information

T o receive a free CBOT publications catalog, which lists the many educational publications and
audiovisual materials available, call or write:

Chicago Board of Trade

Publications Department
141 W. Jackson Blvd.
Suite 2210
Chicago, IL 60604-2994
800-THE-CBOT or 312-435-3558
Fax: 312-341-3168

Also, those with Internet access can find regularly updated contract specifications and various other
information regarding both the CBOT and MidAm at the following addresses:
CBOT web site: www.cbot.com
MidAm web site: www.midam.com

EM42-2
© 1991, 1992, 1994, 1997, 2000 Board of Trade of the City of Chicago. All rights reserved.

The information in this publication is taken from sources believed to be reliable, but it is not
guaranteed by the Chicago Board of Trade as to accuracy or completeness, nor any trading result, and
is intended for purposes of information and education only. The Rules and Regulations of the Chicago
Board of Trade should be consulted as the authoritative source on all current contract specifications and
regulations.

7.00.12000 00-03047

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