A futures exchange, legally known in the U.S. as a “designated contract market,” is, at its core, an auction market – highly regulated, technical and complex – but an auction market nonetheless.

A futures exchange is the only place where futures and options on futures (which offer the right, but not the obligation, to buy or sell an underlying futures contract at a particular price) can be traded. Trading may take place either on the exchange’s trading floor or via an electronic trading platform. An exchange itself does not trade futures. Instead, it:

• Provides and maintains the facilities where buyers and sellers meet, ranging from traditional “trading pits” to global electronic trading networks
• Researches, develops and offers futures contracts to be traded
• Oversees the trading of its products and enforces trading-related rules and regulations
• Monitors and enforces financial and ethical standards
• Provides daily and historical data on the contracts traded under its auspices

Futures exchanges in the U.S. are subject to a great deal of regulation. They are monitored by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). In addition, most futures exchanges practice intense self-regulation, monitoring their employees and the trading practices that occur in their facilities.

These agencies look after the public interest, ensure fair practice and monitor the process of price discovery that occurs in futures trading. Other governmental bodies, including the Securities and Exchange Commission, the Federal Reserve Board, and the U.S. Treasury Board also monitor some futures exchange functions. Violations of exchange rules can result in substantial fines, as well as suspension or revocation of trading privileges.

Futures Exchanges in the U.S. and Abroad

There are currently 13 futures exchanges registered in the U.S. but not all are hosting active trading. CME is the largest futures exchange in the U.S. by volume, and the first U.S. futures exchange to become a for-profit corporation, after revising its original private membership structure and a becoming publicly traded company in 2002. Most U.S. exchanges remain not-for-profit, private membership organizations, but a number of them are actively weighing the advantages of changing to stock corporations.

There are more than 50 futures exchanges worldwide, and they are structured in a number of different ways. Some futures exchanges are owned by groups of banks or by a stock exchange holding company. Other exchanges, or their holding companies, are publicly listed on a stock exchange, similar to CME.

How Futures Exchanges Earn Income

Since futures exchanges do not themselves engage in trading, people sometimes wonder how they earn money. Futures exchanges earn income primarily by:

• Receiving a fee for every trade made through the exchange.
• Selling price data – current, streaming price data in real time as well as historical price data on trades made through the exchange. At CME, data subscription services include CME E-quotes™ and CME E-history.
• Charging for clearing services, if the futures exchanges own their own clearing house, as is the case with CME.  Some exchanges outsource the clearing function. The Chicago Board of Trade, for example, has its contracts cleared through the CME Clearing House.