What Is a Commodities Exchange?

A commodities exchange is a legal entity that determines and enforces rules and procedures for trading standardized commodity contracts and related investment products. A commodities exchange also refers to the physical center where trading takes place. The commodities market is massive, trading more than trillions of dollars each day.

Traders rarely deliver any physical commodities through a commodities exchange. Instead, they trade futures contracts, where the parties agree to buy or sell a specific amount of the commodity at an agreed-upon price, regardless of what it currently trades at in the market at a predetermined expiration date. The most traded commodity future contract is crude oil.

There are several types of modern commodities exchanges, which include metals, fuels, and agricultural commodities exchanges.

KEY TAKEAWAYS

• A commodities exchange determines and enforces rules and procedures for trading standardized commodity contracts and related investment products.
• It also refers to the physical center where trading takes place.
• Two of the best-known commodity exchanges in the U.S. are the Chicago Mercantile Exchange Group and the New York Mercantile Exchange.
• Traders rarely take delivery of physical commodities, but trade futures contracts, agreeing to buy or sell commodities at an agreed-upon price by a predetermined date. 
• There are no longer active trading floors for the majority of commodities exchanges. 

Understanding Commodities Exchanges 

Commodities exchanges are the central location where commodities are traded. The commodity markets began with the trading of agricultural products such as corn, cattle, wheat, and pigs in the 19th century. Chicago was the main hub for this kind of trading, due to its geographical location near the farm belt and because it was a key east-west transit point with railroad access. Modern commodity markets trade many types of investment vehicles, and are often utilized by various investors from commodity producers to investment speculators.

Two of the best known commodity exchanges in the United States are the Chicago Mercantile Exchange (CME) Group and the New York Mercantile Exchange (NYMEX). CME Group is the world's leading and most diverse derivatives marketplace, handling three billion contracts worth approximately $1 quadrillion annually, while the NYMEX is one part of the CME Group.