An Introduction to U.S. Commodity Futures Markets: A Historical Perspective Along with Commodity Trading Principles August 2016

Hilary TillResearch Associate, EDHEC-Risk InstitutePrincipal, Premia Research LLC

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This paper provides an introduction to U.S. commodity futures markets, which is especially relevant for individuals in developing markets who are newly embracing market solutions to financial uncertainty. The paper specifically covers the following topics: (1) the beginning, transformation, and current challenges for U.S. commodity futures markets; (2) design considerations for a commodity futures program; and (3) a concrete example of a commodity investment process in action.

This paper is based on a seminar provided by the author at the Chicago Institute of Investment on August 1, 2016. The research work included in this seminar was jointly developed with Joseph Eagleeye of Premia Research LLC.

Research assistance from Katherine Farren, CAIA, of Premia Risk Consultancy, Inc. is gratefully acknowledged.

EDHEC is one of the top five business schools in France. Its reputation is built on the high quality of its faculty and the privileged relationship with professionals that the school has cultivated since its establishment in 1906. EDHEC Business School has decided to draw on its extensive knowledge of the professional environment and has therefore focused its research on themes that satisfy the needs of professionals.

EDHEC pursues an active research policy in the field of finance. EDHEC-Risk Institute carries out numerous research programmes in the areas of asset allocation and risk management in both the traditional and alternative investment universes.

Copyright © 2016 EDHEC

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The Beginning, Transformation and Current Challenges of U.S. Futures Markets

The Beginning of U.S. Futures MarketsIn discussing the beginning of U.S. futures markets, this paper will cover the grain futures markets before covering the financial futures markets, both of which were Chicago innovations.

The Grain Futures Markets: A Natural Consequence of Chicago’s Early HistoryA significant part of the history of U.S. futures markets includes the story of Chicago innovation and speculation. Once Chicago became a transportation hub and grain terminal in the mid-1800s, grain merchants had to figure out how to manage the price risk for their accumulating volume of grain inventories. Eventually, that solution was the development of a formalised exchange: the Chicago Board of Trade (CBOT).

By the mid-1800s, Chicago was already a well-established centre of financial risk-taking because of the land speculation that had occurred in Illinois in the 1830s during the building of a crucial canal that ultimately linked productive Illinois farmland to major population centres. (Please see Figure 1.) “Even before construction [of the canal] began, speculators flocked to Chicago to buy up land in what they hoped would be a thriving canal port. Many made huge profits,” wrote Baldwin (2000). Wrote contemporary author Harriet Martineau (1837): “I never saw a busier place than Chicago was at the time of our arrival. The streets were crowded with land speculators, hurrying from one sale to another.”

Figure 1: The Illinois and Michigan Canal

“The canal was completed in 1848. It was the last link in an inland water route from the Mississippi Valley, through the Great Lakes, through the Erie Canal, and down the Hudson River to New York City.”Source: Baldwin (2000).

By the mid-1800s, large volumes of grain were transported via the newly functioning canal and railroad systems to “Chicago [where the grain] … was stored and graded in huge grain elevators, then poured through chutes into barges and ships to be sent to the East Coast,” explained Baldwin (2000).

A common theme in both the development of Chicago and its futures markets, which has repeated itself time again, has been “from crisis comes opportunity.” Wrote Hieronymous (1971): “By the time of the Crimean War in the 1850s, Chicago, with its rich outlying agriculture area, was in an excellent position to supply the disrupted world grain trade. During the [U.S.] Civil War[,] Chicago served as the chief grain concentration point of the Union armies.”

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“In 1848, a group of Chicago merchants formed the Chicago Board of Trade … to develop a set of codes and rules for buying, weighing and grading of wheat and corn that flowed to Chicago as the great terminal market of middle America, and for negotiating commercial disputes which arose as a result of this trade in grain,” explained Stassen (1982). The Chicago Board of Trade’s first directory of 25 members included “a druggist, a bookseller, a tanner, a grocer, a coal dealer, a hardware merchant, and a banker,” according to Lurie (1979) as cited in Santos (2008).

“The Crimean War and subsequently the Civil War resulted in sharply fluctuating prices. Chicago merchants were reluctant to bid vigorously for deferred delivery. They tended to keep the forward bids below prices that they thought would prevail at the time of delivery because of the danger of a price decline. There were other, more adventurous people who would bid up to or above current prices. Many of these people were not connected with the grain trade; they were merchants in other businesses, including land speculators, lawyers, physicians, and the like,” explained Hieronymous (1971).

And thus we see the start of commodity speculation as its own specialty, separate from being involved in the business of the commodity itself, from the earliest days of the Chicago Board of Trade.

The Financial Futures Markets: A Post-Bretton-Woods-Accord InnovationWith hindsight, we now know that Chicago’s century-plus heritage of financial risk-taking has served the city well. It was Chicago futures traders who successfully responded to the dislocations that were caused by the collapse of the Bretton Woods system of fixed exchange rates. According to Melamed (1994), “The concept of a centralised market for transferring foreign currency risk gained momentum in 1971 when the dollar was devalued and member countries of the International Monetary Fund agreed to widen the original one per cent parity to a 2-1/4 percent par value level.” Continued Melamed (1994): “This move was one of a series of steps leading up to the eventual collapse of the Bretton Woods Agreement, which in turn, ushered in an era of considerable risk in currency price fluctuation – risks which could be limited if there were a viable market for currency futures trading.”

The Chicago exchanges developed financial hedging instruments in both currencies and interest rates in the 1970s and 1980s. Equity index futures contracts were added in the 1980s. These developments can be seen as additional cases of “from crisis comes opportunity.” Concluded Melamed (1994): “The economic benefits of risk transfer and price discovery that futures trading provides became available to those outside the agricultural sector” with numerous financial futures markets innovations.

The Transformation of US Futures MarketsThe US futures markets were transformed in the 1990s by electronic trading and also by demutualisation. The Chicago Board of Trade, Chicago Mercantile Exchange, the New York Mercantile Exchange had to face up to competitive threats resulting from electronic trading. The starkest example came from Europe in 1998. At that time, the electronic exchange, the EUREX/DTB, successfully won control of the 10-year German government bond futures contract, the Bund contract, from the then open-outcry LIFFE exchange in London with a “price war on fees.” This unprecedented victory of an all-electronic venue accelerated change in Chicago, to say the least. Soon thereafter both the Chicago Board of Trade and the Chicago Mercantile Exchange embraced simultaneous open-outcry and electronic trading. Under pressure from ICE Futures Europe, an electronic futures exchange, the NYMEX listed its energy futures contracts on the CME’s Globex electronic trading system in 2006.

The introduction of electronic futures trading and, in some cases, entire electronic exchanges challenged the existence of both the traditional exchange and the open-outcry trading model. In the late 1990s, the worries on Chicago’s continued competitiveness continued unabated. According to Melamed (2009), “the only way to prepare … [the CME] for the twenty-first century” was to demutualise; a member-driven organisation would be too slow in its decision-making. The result could be that the CME would lose the first-mover advantage that could result from taking advantage of expected disruptive changes that, in turn, could occur from globalisation and technological changes. Therefore, the CME went public in 2002, becoming the first U.S. financial exchange to do so. By 2006, the Chicago Mercantile Exchange’s trading volume exceeded 2.2 billion contracts – worth more than $1,000 trillion – with three-quarters of trades executed electronically. In 2007 the CBOT merged into cross-town rival CME; and in 2008, the NYMEX merged into the combined Chicago exchange. With lightning-fast execution, we now have a whole new world of very short-term algorithmic trading available to speculators in the futures markets.

Arguably, a lot of the product innovation now is moving from the exchanges to electronic trading firms, which develop their own algorithms rather than relying on exchanges to create new instruments. Confirming Melamed’s concern on how competitive the global environment would become, Acworth (2012) reported that two-thirds of all futures volume was traded outside the United States. (Please see Figure 2.)

Figure 2:

Source: Acworth (2012).

In 2012, the CME considered a radical change, but eventually decided that it was not necessary. In particular, the CME Group was “appalled by the … misuse of segregated funds by two firms, MF Global Inc. and PFG, particularly since there had never been anything like it in the history of the futures industry,” according to the CME Group (2012). Four years ago, the CME Group explored whether “clearing houses or other depositors [should] hold all customer segregated funds …while returning any interest earned on that money back to the Futures Commission Merchants,” noted the CME Group (2012). This would have fundamentally changed the business model for FCMs, but the CME Group decided not to go forward with this change.

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The Current Challenges in US Futures MarketsThere are a number of current challenges for futures exchanges, futures commission merchants (FCMs), and proprietary trading firms, which are discussed below.

Futures Exchange ChallengesA key challenge for futures exchanges now concerns trading volume. According to Kramm and Forman (2015), “While [futures trading] volumes and volatility have seemingly been under pressure from a number of factors, it appears that both open interest and the number of market participants continue to increase across most major products.”

The Intercontinental Exchange’s response to lower trading volumes has been to launch new business lines. With ICE’s market data and technology unit earning superior margins, the exchange strategically added to its most profitable business line with its acquisition of SuperDerivatives in 2014. SuperDerivatives could eventually challenge the Bloomberg terminal’s supremacy if at some point Wall Street banks can “break free of their reliance on Bloomberg terminals,” as noted in Finextra (2014).

Another response to lower trading volumes has been to seek out international diversification. “CME Europe made its official debut … [in April 2014], initially launching with 30 foreign exchange futures contracts and biodiesel futures. For the CME Group, owner of the world's largest futures exchange, the market is its first outside the U.S.,” wrote Caruthers (2014).

According to the Executive Chairman and President of the CME Group, “London will give us the best location to serve both European and Asian market participants, allowing those clients to have the choice of trading and clearing with CME in a relevant time zone and jurisdiction,” as quoted in Caruthers (2014).

Futures Commission Merchant ChallengesAnother challenge for the futures industry is the sustainability of the Futures Commission Merchant business model. According to Reuters (2012), “In the past few years, the extension of near-zero interest rates eradicated hope of a rebound in a key source of income: interest on customers’ margin.”

Figure 3 shows the decline in the number of FCMs from the 4th quarter of 2002 through the 1st quarter of 2015.

Figure 3:

Source: Kramm and Forman (2015).

“[A]cting as an FCM is now only marginally profitable (and at times unprofitable) due to … low trading volumes, low interest rates, and the high amount of capital that must be held against client positions,” wrote Kramm and Forman (2015).

Proprietary Trading Firm ChallengesChicago proprietary futures trading firms are also facing challenges. So innovation by Chicago’s proprietary trading firms continues, out of necessity. According to Alex Brockmann of TradeLink Capital, “What I have noticed is that the profitability of the prop[rietary] trading businesses has actually been declining since about 2009, and what you see as a consequence is that some proprietary trading firms are edging toward asset management as a way to earn something from the infrastructure and the intellectual capital they have developed,” as interviewed in Melin (2013).

Chicago traders also face stiffer competition due to globalisation. Noted Meyer (2015), “The rise of proprietary groups in emerging markets [with lower cost structures] comes as electronic trading loosens ties between exchanges and the local communities that built them. … 30 per cent of CME’s electronic trading revenue now comes from abroad.”

It is clear from both this historical and current review of U.S. futures markets that these markets and their participants will have to continue to furiously innovate, as ever more disruptive changes lead to ever more opportunities.

Design Considerations for a Commodity Futures ProgramThe second part of this paper will discuss how to design a commodity futures program for the benefit of those individuals who have newly entered this field.

When designing a commodity futures trading program, one needs to create an investment process that addresses the following issues:• Trade discovery,• Trade construction,• Portfolio construction, • Risk management, • Payoff profile, • Leverage level, and• How the program will make a unique contribution to an investor’s overall portfolio.

Trade DiscoveryThe first step is to discover a number of trades in which it is plausible that the trader has an “edge” or advantage. In some cases, a number of futures trading strategies can be well known and publicised and which, nonetheless, does not prevent them from continuing to exist in some form.

In discussing consistently profitable grain futures trades, Cootner (1967) stated that the fact that they “persist in the face of such knowledge indicates that the risks involved in taking advantage of them outweigh the gain involved. This is further evidence that … [commercial participants do] not act on the basis of expected values; that … [these participants are] willing to pay premiums to avoid risk.” Cootner’s article discussed detectable periods of concentrated hedging pressure by agricultural market participants that lead to “the existence of … predictable trends in future prices.” His article provided several empirical examples of this occurrence in the agricultural markets.

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One can also examine the petroleum market to see if there are any persistent price tendencies that can be linked to structural aspects of this market. When one examines the activity of commercial participants in the petroleum futures markets, it appears that their hedging activity is bunched up within certain time frames. These same time frames seem to also have detectable price trends, reflecting this commercial hedging pressure. Like other commodities, the consumption and production of petroleum products are concentrated during certain times of the year, as illustrated in Figure 4.

Figure 4:

Source: Miron (1996).

This is the underlying reason for why commercial hedging pressure is also highly concentrated during certain times of the year. One may think of the predictable price trends that result from concentrated hedge pressure as a type of premium the commercial market participants are willing to pay. That commercial participants will engage in hedging during predictable time frames and thus will pay a premium to do so may be compared to individuals willing to pay higher hotel costs to visit popular locations during high season. They are paying for this timing convenience.

Another example of a persistent price pressure effect is as follows. It appears that the futures prices of some commodity contracts will sometimes embed a fear premium due to upcoming, meaningful weather events. Corn is one such example. The result is that coming into the U.S. growing season, grain futures prices seem to systematically have a premium added into the fair-value price of the contract, which usually results in the price of corn falling if there is no adverse weather. The fact that this premium can be easily washed out if no adverse weather occurs is well known by the trade.

Trade ConstructionAs one gains experience in commodity futures trading, one finds that a trader can have a correct commodity view, but how one constructs the trade to express the view can make a large difference in profitability. In order to express a commodity view, one can employ outright futures contracts, options, or spreads on futures contracts. At times one may find that futures spreads are more analytically tractable than trading outrights. There is usually some economic boundary constraint that links related commodities, which can (but not always) limit the risk in position-taking.

Portfolio ConstructionOnce a trader has discovered a set of trading strategies that are expected to have positive returns over time, the next step is to combine the trades into a portfolio of diversified strategies. The goal is to combine strategies that are uncorrelated with each other so that one ends up with a dampened-risk portfolio.

Now for all types of leveraged investing and trading, a key concern is inadvertent concentration risk. In leveraged commodity futures trading, one must be careful with commodity correlation properties. Seemingly unrelated commodity markets can become temporarily highly correlated. This becomes problematic if a commodity manager is designing their portfolio so that only a certain amount of risk is allocated per strategy. The portfolio manager may be inadvertently doubling up on risk if two strategies are unexpectedly correlated.

Normally, natural gas and corn prices are unrelated. But during July, they can become highly correlated. Both the July corn and natural gas futures contracts are heavily dependent on the outcome of weather in the U.S. Midwest. During that time, both corn and natural gas futures prices can respond in nearly identical fashions to weather forecasts and realisations. If a commodity portfolio manager includes both natural gas and corn futures trades in their portfolio during this time frame, then that trader would have inadvertently doubled up on risk. We note then that in order to avoid inadvertent correlations, it is not enough to measure historical correlations. A trader needs to have an economic understanding for why a trade works in order to best be able to appreciate whether an additional trade will act as a portfolio diversifier. In that way, the trader will potentially avoid inadvertently doubling up on risks.

Risk ManagementThe fourth step in designing a commodity futures trading program is risk management. One wants to ensure that during both normal and eventful times that the program’s losses do not exceed a client’s comfort level. Regarding risk measures, on a per-strategy basis, it is useful to examine each strategy’s:• Value-at-Risk based on recent volatilities and correlations;• Worst-case loss during normal times;• Worst-case loss during well-defined eventful periods;• Incremental contribution to Portfolio Value-at-Risk; and• Incremental contribution to Worst-Case Portfolio Event Risk.

The latter two measures give an indication of whether the strategy is a risk reducer or risk enhancer.

On a portfolio-wide basis, it is useful to examine the portfolio’s:• Value-at-Risk based on recent volatilities and correlations;• Worst-case loss during normal times; and• Worst-case loss during well-defined eventful periods.

Each portfolio risk measure should be compared to some limit, which has been determined based on the design of the futures product. So for example, if clients expect the program to lose no more than say 7% from peak-to-trough, then the three portfolio measures should be constrained to not exceed 7%. If the product should not perform too poorly during say financial shocks, then the worst-case loss during well-defined eventful periods should be constrained to a relatively small number. If that worst-case loss exceeds the limit, then one can devise macro portfolio hedges accordingly.

Understanding a portfolio’s exposure to certain financial or economic shocks can help in designing macro portfolio hedges that would limit exposure to these events. For example, a commodity portfolio from the summer of 2002 consisted of the following positions: outright long wheat, a long gasoline calendar spread, and short outright silver. When carrying out an event-risk analysis on the portfolio, the worst-case scenario was a 9/11/01 scenario. This is because the portfolio was long economically sensitive commodities and short an instrument that does well during times

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of “flights-to-quality.” Normally, though, these positions are unrelated to each other. Given that the scenario that would most negatively impact the portfolio was a sharp shock to business confidence, one candidate for macro portfolio insurance was short-term gasoline puts to hedge against this scenario.

Payoff ProfileFurther, investors in futures programs frequently expect a long-options-like payoff profile from commodity trading programs. Figure 5 provides an example of a crude oil futures trading strategy that, at least historically, has the desired long-options-like payoff profile (the “conditionally entered” Brent futures strategy) while passively investing in Brent oil futures contracts does not (the “unconditionally entered” Brent futures strategy.)

Figure 5: “Conditionally Entered” vs. “Unconditionally Entered” Brent Crude Oil Futures (Excess) Returns End-January 1999 through End-December 2014

The calculations underlying this chart were performed by Joseph Eagleeye, Premia Research LLC.Source: Till (2015).

LeverageAnother consideration in designing a commodity futures program is how much leverage to use. Futures trading requires a relatively small amount of margin. Trade sizing is mainly a matter of how much risk one wants to assume. An investor is not very constrained by the amount of initial capital committed to trading. What leverage level is chosen for a program is a product design issue. One needs to determine: “How will the program be marketed, and what will the client’s expectations be?”

Choosing the leverage level for a futures program is a crucial issue because it appears that the edge that successful futures traders are able to exploit is small. Only with leverage do their returns become attractive.

Investor’s Overall PortfolioA final consideration in creating a futures trading program is to understand how one’s program will fit into an investor’s overall portfolio. In order for investors to be interested in a new investment, that investment must have a unique return stream: one that is not already obtained through their other investments. More formally, the new investment must be a diversifier, either during normal times or eventful times. It is up to the investor on how a new investment should fit into their portfolio. A futures trading program may be evaluated on how well it diversifies an equity portfolio. Or it may be judged based on how well it diversifies a basket of veteran Commodity Trading Advisors. Finally, a new futures trading program may be evaluated on how well it improves a fund-of-hedge-fund’s risk-adjusted returns.

In conclusion, a prospective commodity manager must not only discover trading strategies that are expected to be generally profitable, but must also be careful regarding each strategy’s correlation properties during different times of the year and during eventful periods. Finally, one must ensure that the resulting product has not only sufficiently attractive returns, but also a unique enough return stream that it can be expected to provide diversification benefits to an investor’s overall portfolio.

An Investment Process in ActionWe will now turn to some examples of combining structural sources of return in the commodity markets in a comprehensive investment process.

As noted previously, the first step in designing a commodity program is to survey the commodity investment universe for opportunities. During times of price stability, the commodity markets that have historically had the highest returns all share one characteristic: They typically trade in backwardation, whereby the nearer month contract trades at a premium to the deferred delivery contracts. This is typically an indication of scarcity: market participants will pay up relative to the future for the spot commodity.

Figure 6 provides an example of a backwardated futures curve in the copper market.

Figure 6:

Over the long term, the most fertile ground for looking for profitable opportunities has been in the energies, base metals, and livestock markets. Each of these sectors has had healthy returns over extended periods of time. A common feature of each of these commodity futures contracts has been that their underlying commodity has a difficult storage situation. For these commodities, either storage is impossible, prohibitively expensive, or producers decide it is much cheaper to leave the commodity in the ground than store above ground. As a result these commodities have relatively low inventories relative to demand. The existence of storage can act as a dampener on price volatility since it provides an additional lever with which to balance supply and demand.

If there is too much of a commodity relative to demand, it can be stored. In that case, one does not need to rely solely on the adjustment of price to encourage the placement of the commodity. If too little of a commodity is produced, one can draw on storage; price does not need to ration demand. Now, for commodities with difficult storage situations, price has to do a lot (or all) of the work of equilibrating supply and demand, leading to very volatile spot commodity prices. Producers and

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holders of commodity inventories will turn to the commodity futures markets to control or manage uncertain forward price risk. The price pressure resulting from commercial hedging activity causes a commodity’s futures price to become biased downward relative to its future expected spot rate. In that situation, a long commodity futures position will have a positive expected return. An active manager can attempt to distill the returns in these markets through entry and exit rules, trade construction, and downside risk management.

Since the driver of returns for the energies, metals, and livestock sectors appears to have been due to their difficult storage situations, an active manager needs to also continually monitor whether these factors are still in place. Once one has chosen the commodity markets to focus on, there are a number of ways to distil a market’s returns. This includes through well-chosen entry rules, such as by entering positions based on:• Positive curve dynamics, namely that the commodity’s futures curve is in backwardation; or• Favourable entry levels; or by entering positions during• Times of seasonal strength.

Another way of distilling returns in a market is through well-chosen exit rules.

This includes exiting positions based on:• Reaching a price target;• A time stop, which means that one only expects a trade to work over a specific time frame; or if• A worst-case loss is reached.

A final way to distil a market’s returns is via the judicious choice of trade construction. This includes whether to express a view on a market through outrights, calendar spreads, intermarket spreads, or options, as touched upon previously.

Two examples of strategies, which rely on backwardation, follow. The first example is in the gasoline market. The left-hand-side of Figure 7 illustrates a gasoline futures curve during July 2004. The horizontal axis is the maturity of each futures contract while the vertical axis is the price level for each futures contract.

Figure 7:

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At that time, the gasoline contract, which matured in November, was priced at a steep discount to the front-month contract. If spot prices did not change over the summer, the November contract would appreciate significantly by “rolling up the curve.” The right-hand-side of Figure 7 provides a copper market example. The horizontal axis is the amount of copper inventories in weeks of consumption while the vertical axis is the price of copper. This graph shows the historical tendency of copper prices to spike when at scarce inventory levels.

One job of an active manager is to monitor whether the fundamental drivers for his or her strategies are still intact. In the examples that have just been provided, one needs to monitor whether each commodity sector’s inventories are expected to remain structurally low. For example, Figure 8 illustrates that the price action of the gasoline refinery margin (also known as the crack spread) had confirmed the fundamental story of structural rigidities worsening in gasoline, as of 2007.

Figure 8:

At the time of the graph’s production, the crack spread had to blow out to quite wide levels in order for refineries to be sufficiently induced to produce sufficient gasoline during peak seasonal demand periods (when the economy wasn’t in recession.)

Now when constructing a commodity portfolio, the goal is have at least 4 to 7 largely uncorrelated strategies at any one time. One can find strategies that normally have correlations amongst each other of -20% to +20%. With such low correlations, portfolio volatility is quite dampened as one adds each of these strategies to an investment portfolio. But then the portfolio manager has to be careful with eventful correlations, as noted previously.

A long-biased commodity program will have systematic risk to severe shocks to the business cycle. Therefore, a commodity manager will have a tendency to include long fixed-income positions in the portfolio as a natural hedge to this systematic risk.

An active commodity program will have fluctuating exposures to various commodity sectors. Figure 9 shows a returns-based analysis of a commodity portfolio from the Fall of 2004.

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Figure 9: Illustration of Seasonally Fluctuating Exposures in a Commodity-Oriented Portfolio

The benchmarks are the S&P Goldman Sachs (GS) Commodity sector excess return (ER) indices and a Bloomberg U.S. fixed-income index. The graph’s y-axis is the fraction of R-squared that can be attributed to a benchmark exposure. This is also known as the benchmark’s variance component. The middle chart shows each benchmark’s contribution to R-squared over the whole history. Source: Prism Analytics.

Using daily data, this returns-based analysis determined which commodity factors best explained this active program’s returns over time. In particular, Figure 9 shows dynamic exposures to energies, metals, U.S. fixed income, livestock, and the agricultural markets in an actively traded commodity-oriented portfolio.

ConclusionWhether it is the trial-and-error development of the commodity futures markets or the struggle of its participants to continually perfect their business models, the story of futures markets is one of constant flux and very disciplined risk management. As should be clear from this paper, the job of managing price risk volatility is a highly specialised one, quite separate from the production and handling of individual commodities. This happens to be a specialty that arose out of frontier America and centred on Chicago speculators, as far back as the city’s founding in the early nineteenth century. And perhaps astonishingly, the capacity for enormous risk-taking endures to this day: “Chicago is … the only town in the world … where you can walk into a large proprietary firm [and] what you see is literally three guys: The trader, the technology guy and the manager, and that’s it. And then you look at the kind of volumes they are trading and you are just staggered. You don’t see that … anywhere else in the world,” as stated by Paul MacGregor of FFastFill in Melin (2013).

While ever more futures trading will likely continue to migrate away from the physical location of Chicago, one might expect the “Chicago model” to continue to be highly relevant as ever, especially in developing countries that are new to adopting Chicago-style futures exchanges. Why? Answer: Because it works.

References• Acworth, W., 2012, “Annual Volume Survey: Volume Climbs 11.4% to 24 Billion Contracts Worldwide,” Futures Industry Magazine, March, pp. 24-33.

• Baldwin, P., 2000, “Chicago History” website, formerly hosted by DePaul University, Spring. Professor Baldwin is now with the University of Connecticut’s Department of History, http://history.uconn.edu/faculty-by-name/baldwin-peter/.

• Caruthers, R., 2014, “CME Europe Opens for Business,” FierceFinanceIT.com, April 29.

• CME Group, 2012, “Letter to Customers from Terrance A. Duffy, Executive Chairman & President, and Phupinder Gill, Chief Executive Officer,” July 23.

• Cootner, P., 1967, “Speculation and Hedging,” Food Research Institute Studies, Supplement, 7, pp. 64-105.

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• Finextra, 2014, “ICE Agrees to $350m SuperDerivatives Acquisition,” September 5. Retrieved from:http://www.finextra.com/news/fullstory.aspx?newsitemid=26424&topic=execution on November 23, 2014.

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• Martineau, H., 1837, Society in America, London: Saunders and Otley, pp. 348-55. Reprinted in Pierce, B.L., 1933, As Others See Chicago: Impressions of Visitors, 1673-1933, Chicago: University of Chicago Press, as cited in Baldwin (2000).

• Melamed, L., 1994, “A Brief History of Financial Futures: Presented at the Seminar on Financial Futures,” Shanghai, May 3.

• Melamed, L., 2009, For Crying Out Loud: From Open Outcry to the Electronic Screen, Hoboken: Wiley.

• Melin, M., 2013, “Opalesque Round Table Series 2013: Chicago,” Opalesque: Premium Alternative News, October 10. Retrieved from: http://www.opalesque.com/files/Opalesque_2013_Chicago_Roundtable.pdf on October 21, 2014.

• Meyer, G., 2015, “Outsourcing: Trading Places,” Financial Times, March 10.

• Miron, J., 1996, The Economics of Seasonal Cycles, Boston: MIT Press, p. 118.

• Reuters, 2012, “For Brokers Like Peregrine, From Bad Times to Worse,” July 23.

• Santos, J., 2008, "A History of Futures Trading in the United States," in Robert Whaples (ed) EH.Net Encyclopedia, March 16. Retrieved from:http://eh.net/encyclopedia/a-history-of-futures-trading-in-the-united-states/ on August 9, 2016.

• Stassen, J., 1982, “The Commodity Exchange Act in Perspective A Short and Not-So-Reverent History of Futures Trading Legislation in the United States,” Washington and Lee Law Review, Washington & Lee University School of Law, June, Vol. 39, No. 3, pp. 825-843. Retrieved from:http://scholarlycommons.law.wlu.edu/wlulr/vol39/iss3/3 on August 26, 2012.

• Till, Hilary, 2015, “Do Commodity Index Holdings Still Make Sense for Institutional Investors? Revisiting the Assumptions,” EDHEC-Risk Days 2015 (London) Conference, March 25, 2015. Available at:http://docs.edhec-risk.com/ERI-Days-2015/PRESENTATIONS/D2_Stream_HT.pdf

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Established in 2001, EDHEC-Risk Institute has become the premier academic centre for industry-relevant financial research. In partnership with large financial institutions, its team of ninety permanent professors, engineers, and support staff, and forty-eight research associates and affiliate professors, implements six research programmes and sixteen research chairs and strategic research

projects focusing on asset allocation and risk management. EDHEC-Risk Institute also has highly significant executive education activities for professionals.

In 2012, EDHEC-Risk Institute signed two strategic partnership agreements with the Operations Research and Financial Engineering department of Princeton University to set up a joint research programme in the area of risk and investment management, and with Yale School of Management to set up joint certified executive training courses in North America and Europe in the area of investment management.

In 2012, EDHEC-Risk Institute set up ERI Scientific Beta, which is an initiative that is aimed at transferring the results of its equity research to professionals in the form of smart beta indices.

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