By Philip McBride Johnson
There has been much talk recently of the CME Group's
decision to close most of its trading floor as electronic means
of executing orders have come into dominance.
As many of us who witnessed the dynamics of floor trading
mourn this passing (I was outside counsel to the Chicago Board
of Trade for over a dozen years), some observers have also
noted the quiet change in terminology from commodity markets to
futures or derivatives exchanges (my legal treatise Commodities
Regulation, first published in the early 1980s, is now
Derivatives Law and Regulation).
It has long been my belief that these markets are permitted
- indeed, encouraged - not because they allow speculators to
bet on prices but because they promote risk management
("hedging") by those who need such protection while engaged in
business across many industries.
Speculators are permitted in order to supply liquidity due
to the fact that hedgers will rarely find other hedging
counterparties at those moments when risk protection is most
If speculators were the only market participants, the
exchanges would likely be shuttered as gambling dens (which are
commonly banned under state law as "bucket shops").
Futures markets are permitted not because they allow speculators to bet on prices but because they promote risk management
In other words, despite the canard that futures markets are
venues for "grain gamblers," they provide an invaluable
insurance (yes, insurance) service to the business
True, they do not pool risk quite like most traditional
insurers, but they behave very much like Lloyd's of London
where private investors fund the program.
So, why don't we call them "insurance exchanges?" The public
would then know instantly why they exist and why they are
important. This would immediately dispel the negative images
of these institutions as Wild West crap shoots and give them
their just desserts.
When I form the next such market (just kidding!), I will call
it the Global Insurance Exchange.