Topic. 3: Stock exchanges of North America

The history of the American stock market dates back to the early 1800s, when Chicago became an important center for the sale, storage and redistribution of agricultural products, in particular grain. As mentioned earlier, Chicago played an important role due to its convenient logistical location.

The development of international stock trading, the emergence and evolution of stock trading technology were closely related to the formation of our civilization, changes in production technologies, the emergence of an organized form of trading in goods and financial assets.

In 1848, a significant event took place - the now world-famous commodity exchange and derivative contract exchange were opened in the United States, which was founded by a group of traders with the aim of ensuring regulated grain trade in the Midwest. After all, at that time there were significant fluctuations in prices for agricultural products, mainly due to seasonal factors and speculative manipulations. To avoid significant price drops in the markets, farmers often had to either withdraw grain from trade or destroy it.

The first way to avoid price distortions was to conclude forward contracts. Agreements concluded on the exchange provided an opportunity to agree on the price and future delivery before sowing the grain. Soon the Chicago Mercantile Exchange became the main place for the sale of grain. In 1855, France transferred all its deliveries from New York to Chicago, which indicates the efficient operation of the exchange.

The main improvement in the work of the Chicago Mercantile Exchange was the creation in 1858 of a department for the standardization of exchange contracts. This department was engaged in the classification of grain varieties. The quality system provided for several quality checks of the grain during the sale process to ensure the quality and purity of the goods. Often, when storing grain in warehouses of different owners, they were mixed, which affected the subsequent price. In this regard, the Chicago Mercantile Exchange proposed a new sorting and storage system. In particular, farmers received warehouse receipts for the grain they had accepted for storage in exchange warehouses. In addition, the amount of grain was standardized according to the parameters of exchange transactions.

Futures trading on the Chicago Mercantile Exchange helped to transition to trading in large batches of goods, because the delivery itself could not be done, but trading was carried out using warehouse receipts.

Futures contracts guaranteed farmers a certain price in the future months of contract execution.

For speculation, futures contracts became an excellent tool for making profits from future price changes. Speculation turned over-the-counter market participants against itself due to speculative sentiment, and on the other hand, it increased confidence in futures trading due to the large number of exchange participants.

In 1888, about 25 billion bushels of wheat were sold through futures contracts without delivering the assets. At that time, only 415 million bushels of wheat were harvested in the United States.

Futures markets at that time facilitated the efficient distribution of grain across states, which ensured price stabilization and the efficient functioning of the spot market for grain crops in the United States.

A comparison of the average annual price fluctuations for the three types of grain crops in percentages (Table 3.1.) shows that wheat and oats, which were traded under futures contracts on the Chicago Mercantile Exchange, had a smaller amplitude of price fluctuations than barley in the period from 1899 to 1916.

It can be seen that price fluctuations on the Chicago Mercantile Exchange were less intense than on the over-the-counter market. After all, only once in 1916 did wheat price fluctuations exceed 100 percent. Meanwhile, oats showed similar statistical variation in 1901 and 1902.

Since the early 1990s, trading in derivative contracts has begun to gain significant volume on the over-the-counter market and in subsequent years has significantly outpaced stock market performance.

The history of international stock market activity is closely linked in the last century to the American stock market.

In the mid-1990s, new financial instruments, namely credit default swaps, became the next in trade. Two new acts of Congress, including the Financial Services Modernization Act and the Commodity Futures Modernization Act, contributed to the improvement of exchange regulation in the United States.

Since the new millennium, international stock market trading has recorded an increase in derivatives trading volumes. Thus, in 2017, trading volumes increased to 25 billion, which is almost twice as high as in 2006.

Globalization and the expansion of borders allowed not only to integrate highly developed stock markets into the global stock exchange system, but also contributed to the spread of international experience in stock trading technologies, new instruments, and new guarantee conditions for stock trading.

Legislative regulation of stock trading in the United States plays an important role in ensuring the efficient functioning of organized commodity and financial markets. At the beginning of the history of stock trading in the United States, regulation contributed to the geographical coordination of organized agricultural markets located in different states.

In the late 1800s, laws and rules regulating stock trading were aimed at regulating the agricultural market, the main goal of which was to create an efficient price mechanism.

Speculation could contribute to the efficiency of the American stock market and required transparent regulation. In the early 1900s, the US government took a relatively negative position regarding the influence of speculation on stock trading due to its likely impact on prices and volatility.

US futures markets required special regulation. Thus, in 1922, Congress adopted the first regulation of grain trading, adopting the Grain Futures Act. This law was passed after the collapse of grain prices after World War I, when the World Trade Organization accused speculators of adversely affecting price dynamics. The farm lobby pressured Congress to completely ban futures trading, accusing speculators of aggressive behavior on exchange platforms.

The Grain Futures Act of 1922 introduced a provision requiring futures trading to be conducted only on regulated platforms - on commodity exchanges in the United States. This law introduced a strict system of trader reporting, according to which each participant was obliged to report daily on the market positions of each trader and, in case of excess, to report. It should be noted that these requirements have remained with the Commodity Futures Trading Commission - the state regulator of commodity exchange markets.

Between 1922 and 1936, there was no change in federal regulation of grain exchanges. In 1933, the Glass-Steagall Act separated commercial and investment banking, and the subsequent regulation of stock market trading in 1929 led to the Great Depression. This act was intended to restrict the use of bank loans for speculative trading in the U.S. commodity and stock markets. In essence, commercial banks were restricted from trading in securities in order to prevent excessive use of customer funds for risky speculative strategies in the securities markets.

In 1936, the Commodity Exchange Act was passed, which amended the Grain Futures Act. This law deepened the regulation of the activities of American commodity exchanges and additionally established strict restrictions on futures trading exclusively on exchanges, which strictly prohibited over-the-counter trading of futures on commodity assets, in particular wheat, corn, silver, etc. At the same time, the law also expanded its powers to other types of commodity assets, namely cotton, rice, compound feed, butter, eggs, potatoes. In this regard, the keyword “grain” in the title of the law was changed to “commodities”.

In accordance with this law, Congress created a federal agency for the management of commodity exchanges, located within the US Department of Agriculture, to monitor the activities of commodity exchanges and prevent market manipulation.

The Commodity Exchange Act gave the Commodity Exchange Commission the authority to regulate commodity exchanges by establishing federal restrictions on speculative strategies, as well as on unscrupulous hedgers who could not comply with exchange trading requirements, as well as elevators who did not comply with storage regulations. Another important measure in strengthening regulation was the segregation in customer accounts of funds allocated for margin deposits to guarantee exchange transactions.

It should also be noted that this law prohibited trading in options on various assets due to speculative fraud. This strict regulatory approach allowed to avoid speculative manipulations, but created certain problems for the economy by restraining the liquidity of exchange trading.

The emergence of a state regulator, the Commodity Exchange Commission, contributed to transparency on exchange platforms. The commission was composed mainly of representatives of state institutions, ministries and the justice system. The main tasks of the state body were:

- licensing of exchange trading in commodity assets;

- registration of traders and brokers on exchanges;

- protection of clients' financial assets;

- restriction of speculative transactions;

- prohibition of price manipulation;

- prohibition of the dissemination of false information;

- bringing to justice for violations of norms.

For more than a decade, the Commission provided information for participants on exchange and over-the-counter platforms. The Commission's authority included agricultural products and futures contracts on them.

Over time, the US Congress ensured the creation of the Commodity Futures Trading Commission (CFTC), which replaced the previous Commission. The Commodity Futures Trading Commission Act of 1974 expanded its jurisdiction.

The Commodity Futures Trading Commission still has broad authority over exchange participants. Under the new law, only the Commission can regulate futures trading and license exchanges to introduce new futures contracts. The Commission developed requirements for futures exchanges that could not violate them.

An important mission of the Commission was to regulate the activities of exchange warehouses, and also gave it the privilege to impose disciplinary sanctions on all violators of exchange trading. Under certain circumstances, the Commission could take extraordinary measures, for example, in cases of manipulation and distortion of competition in organized commodity markets.

The Commission has significant powers to monitor the activities of brokers, traders, operators, and other participants in commodity markets. It establishes the conditions for responding to allegations of violations of federal laws by participants in exchange markets.

The Commission has required exchanges and clearing houses to report regularly and has assigned representatives from the Commission to each commodity exchange to monitor compliance with the law.

The Commission has the authority to suspend or revoke licenses if violations are detected at commodity exchanges and brokerage houses.

The Commodity Futures Trading Commission consists of a chairman and commissioners, as well as 14 operating departments. It is headed by a chairman and an executive director.

The Commission is a federal body appointed by Congress. The chairman of the commission belongs to the same party as the US president. He is elected for a 5-year term and is confirmed by the Senate.

The National Futures Association plays an important role in protecting the interests of participants in the US stock market. The NFA was founded on September 22, 1981, when the Commodity Futures Trading Commission officially granted the NFA the status of a “registered futures association.” The NFA began its regulatory activities in 1982.

Regulators create transparent conditions for all participants in the exchange trading of commodity or financial derivatives.

Commodity and stock exchanges registered in North America, in particular in the USA and Canada, occupy an important place in the history of the formation of international exchange activity.

Each country in North America has its own stock and commodity exchange of international importance and several other trading exchange platforms that are among the leading in international ratings.

The role of American exchanges, in particular commodity exchanges, began to grow at the end of the 19th century and this role has not changed on a global scale to this day.

The following were included in the list of major exchanges in North America in 2024, according to the Futures Industry Association:

- Intercontinental exchange;

- CME Group;

- NASDAQ;

- CBOE Global Markets;

- TMX Group;

- Bitnomial exchange;

- Fair X;

- Ledger X;

- Miami International Holdings;

- EEX Group;

- North American derivatives exchange.

From the above list, most of the listed exchange alliances, which unite several commodity and stock exchanges. In addition, there are electronic exchange platforms, which were previously over-the-counter platforms. Among the specified list are also cryptocurrency exchanges.

Intercontinental Exchange (ICE) was founded in 1997 through the purchase of a technology startup for $ 1, which was intended to provide transactions in energy markets.

During the first three years of 1997-2000, the platform worked on the development of web technologies for organizing electronic trading in energy markets. During this time, the exchange worked on attracting leading market participants of various types of energy resources to its platforms, who sought transparency and neutrality of the electronic exchange platform.

The Intercontinental Exchange is now a major player in the major international organized commodity and financial markets.

In May 2000, a new trading platform, the Intercontinental Exchange (ICE), was launched. This name encouraged its integration on an intercontinental level, attracting new trading venues and international investors of a global level. As a result, today more than 70 countries around the world participate in exchange transactions on the exchange, including participants from the UK, the Netherlands, Singapore, Canada and the USA.

In 2001, the Intercontinental Exchange gained access to clearing when the London International Petroleum Exchange (IPE) sought to move from floor trading to electronic trading. At that time, IPE was a regional exchange offering oil futures contracts and had less than a 25% share of the global oil futures market. Virtually all of IPE’s trading volume was conducted through the trading floor, which was located opposite the Tower of London. At the same time, IPE’s owners, who were mostly energy companies, were watching developments at the London International Financial Futures and Options Exchange (LIFFE) and seeing how rapidly technology was transforming their markets. This created a heightened sense of urgency and understanding of the technological requirements to become a global marketplace in the Internet age.

Following the completion of the acquisition of IPE, now known as ICE Futures Europe, the exchange quickly set to work on two key projects. The first was the development of new cleared swap products, which began trading in 2002, well before the importance of clearing was more widely recognized. The second was the construction of electronic futures and options markets on the ICE trading platform, which dramatically increased the former IPE's share of oil futures trading volume and transformed it from a regional to a global exchange.

In February 2005, the Intercontinental Exchange successfully transitioned the IPE crude oil and petroleum products markets, which included Brent and Gasoil futures, to the electronic exchange platform.

The acquisition of the International Petroleum Exchange (IPE) was important for ICE, as the exchange’s primary objective was to expand the number of energy contracts. As a result, London’s role as a global energy trading market center increased.

In 2006-2007, ICE acquired the American New York Mercantile Exchange (NYBOT), and also gained the opportunity to use the clearing system of this exchange, which is now called ICE Clear US, and expand the global market for its commodity assets - sugar, cotton, coffee. The exchange spent $ 1 billion on this purchase.

In Europe, the exchange also created a clearing board, ICE Clear Europe, in London. London was an obvious choice, given the location of global energy markets, as well as the need for additional clearing settlements. Shortly after the launch of this system, the exchange launched a clearing model for European credit default swaps (CDS), which has a separate risk structure, guarantee fund and management.

Today, ICE operates six clearing houses around the world. In December 2014, the exchange acquired a controlling stake in ICE Clear Netherlands, providing a comprehensive clearing infrastructure in continental Europe.

Over the past 15 years, ICE has invested more than £4 billion in its UK operations. This investment has been accompanied by growth in UK revenues, which have increased 10-fold over the same period to approximately $1.4 billion in 2015, equivalent to an approximate annual growth rate of 30% per year.

In 2010, the Intercontinental Exchange acquired the Climate Exchange, expanding its range of exchange-traded contracts and introducing innovative exchange-traded futures contracts. These were related to climate change.

In 2013, a global event occurred as Intercontinental Exchange acquired one of the largest stock exchanges in the world, the New York Stock Exchange. Using the trading and clearing infrastructure for ICE, it expanded its presence in the financial sector with the acquisition of the NYSE, adding financial instruments to its platforms, including stocks, bonds, and stock indices.

American exchanges differ from European ones in that they have their own clearing houses to serve their clients.

The clearing house requires margin payments from both buyers and sellers. The amount of margin payments for each type of futures contract and for different assets is determined individually, taking into account the price volatility of a particular asset. Trading volumes on exchanges are determined by the number of contracts concluded per year. In 2023, 6.1 million contracts were concluded, which is 4% higher than in 2022.

The average rate per contract is defined as the ratio of the total clearing and transaction fee to the total volume of concluded contracts.

The main indicators of the Chicago Mercantile Exchange (CME) are the average daily rates of concluded transactions for various types of assets. The highest figures were recorded for financial assets - 12.5 million contracts per day in 2023.

The main share of exchange trading is made up of transactions concluded on CME Globex - 92% in 2023.

The activation of trading on the Chicago Mercantile Exchange in the field of the electronic exchange system has increased significantly in the last 30 years due to the popularization of this electronic trading technology. It should be noted that at first it was actively used by stock intermediaries - brokers, and over time they allowed their clients to connect to it.

The main indicators of the effective operation of the electronic system are the speed of execution of transactions on it. More than 150 million transactions can be concluded on the Chicago Stock Exchange every day, or each transaction takes 6 milliseconds.

Electronic trading technology is the most advanced trading system currently on all leading exchanges in the world. Online trading is quite widespread and popular among investors at the national and international level.

It should be noted that the open voice auction in the halls of New York and Chicago has ceased to operate since 2018.

The Chicago Mercantile Exchange Group currently provides trading in a variety of commodity and financial assets.

As we can see, today the following types of assets are offered on the exchange:

-         grains and oilseeds;

-         meat of various types in frozen form;

-         various types of dairy products;

-         industrial assets;

-         timber;

-         energy resources;

-         metals.

Commodity derivatives on the above commodity assets, now after a long evolution, have weeded out many goods that could not be stored for a long time and were not subject to standardization of parameters.

At the same time, the top 10 energy derivatives, in addition to oil, also include various types of gas and gasoline.

The quotation board contains various types of agricultural raw materials and semi-finished products. On the exchanges, futures contracts can be concluded for grain and oilseed crops, as well as semi-finished products, such as meat, powdered milk, butter, cheese, coffee, sugar, concentrated orange juice, etc.

Energy resources are the main types of commodity assets on the Chicago Board of Trade, among which the following types of oil can be listed:

- WTI crude oil;

- Brent crude oil;

- mini-futures on WTI crude oil;

- micro WTI;

- mini-futures on crude oil;

- micro-futures on crude oil.

The exchange also has a number of futures contracts for electricity.

The Chicago Mercantile Exchange offers a range of futures contracts for metals, including precious metals and non-ferrous metals. Precious metals include: gold, silver, platinum.

In addition to commodity assets, the Chicago Mercantile Exchange also trades in financial assets, namely:

-         stock indices;

-         interest rates;

-         exchange rates;

-         cryptocurrency;

-         other types.

The Chicago Mercantile Exchange also quotes international stock indices.

Exchange-traded foreign exchange rates on the Chicago Mercantile Exchange are carried out in various types of foreign currencies.

Interest-rate instruments became quite popular on international exchanges at the end of the last century. This market is associated with debt instruments, in particular bonds, treasury bills, etc.

An important role in ensuring the exchange trading of futures contracts was played by the introduction of option contracts on the Chicago Mercantile Exchange. Options, unlike futures, provided the right but not the obligation for buyers.

An important feature of options is that options can be implemented on exchanges only after the implementation and establishment of liquid trading in futures contracts for various types of assets. Therefore, exchange options are tied to their exchange underlying assets, which are futures contracts for various types of commodity and financial assets.

Innovative instruments on the Chicago Mercantile Exchange were introduced several years ago by futures contracts for the main types of cryptocurrencies, namely Bitcoin and Ether.

Given that Bitcoin is one of the most popular cryptocurrencies today, the Chicago Mercantile Exchange has provided the possibility of quotations in US dollars and Euros.

Given that Bitcoin is a fairly valuable exchange asset, for the convenience of investors, the exchange has provided trading in mini-futures contracts.

Exchange-traded cryptocurrency futures can be used effectively to hedge price risks in the over-the-counter cryptocurrency market.

In 2020, the Chicago Mercantile Exchange introduced trading in options on cryptocurrency futures.

The appendices provide some examples of exchange quotes and specifications of the Chicago Mercantile Exchange. CME Group remains the leading derivatives market on a global scale. The advantages of the exchange are:

- high exchange reputation and customer trust;

- efficient settlement and clearing system;

- high liquidity of concluding and executing exchange contracts;

- development of new innovative instruments.