Why you need Futures

July 12, 2011 12:57 PM

When I started at Futures more than a decade ago I realized that while the futures industry was a big deal in Chicago and for us who worked in it (I already had been working in the industry for more than a decade at the time), I also learned that the wider business media community viewed it as a sleepy backwater and knew little about it.

In the last 10 years, however, things have changed as futures' volume exploded, exchanges became public companies and big players in mergers and acquisitions, and assets allocated to futures based investment strategies have grown by a factor of 7X.

 Futures had moved into mainstream or so we thought. Yesterday the Wall Street Journal had a story about the CME Group revamping its Chinese renminbi futures contract. Below the main headline was a subhead that could have been 39 years old. It stated: “Exchange Group Plans Futures on Chinese Yuan, Denominated in Dollars; Moving Beyond the Pork Belly Pit.”

Moving beyond the pork belly pit? They moved beyond the pork belly pit before I started in the industry more than 20 years ago.

It was 1972 When the Chicago Mercantile Exchange launched currency futures through the International Monetary Market. In following decades the CME and Chicago Board of Trade launched interest rate futures, stock index futures, electronic trading and merged.

I understand that there is a certain romance with the pork belly contract and have even noted in print how the CME, now CME Group, is synonymous with it even though it has been decades since it has been a significant part of its business. But this is 2011. It was the 1980s when financial futures greatly surpassed agriculture futures in volume for Chicago’s futures markets. By that time bellies were more lightly traded than the other livestock contracts at CME, let alone their financial contracts.

We even wrote an obit on it when CME decided to move pork bellies exclusively online when they moved CME Group products to the CBOT trading floor. There was no room for the aforementioned belly contract.

And it is not jus the headline writer. The story includes the following: “…as it tries to keep pace with rapidly consolidating rivals, moving beyond the pits trading pork bellies, wheat and corn.”  The vast majority of futures volume in all its products have traded electronically for several years now.

Pork belly futures are still listed according to the CME Group Web site but there has been virutally no volume in 2011. Saying CME Group is moving beyond the pork belly pit is akin to saying Ford is moving beyond the Edsel or perhaps Model T.

When Derivatives giant Deutsche Borse announced its proposed acquisition (yes acquisition) of NYSE Euronext earlier this year, it was floated that CME Group would step in to acquire the NYSE, not the other way around. While that has not happened, it gives you an idea  of the size and scope of its business.

 Yet despite all this we still see talk of pork bellies and floor traders.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.