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What is a Commodity Exchange?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 December 2016
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Commodity exchanges are trading organizations that engage in transactions that involve the buying and selling of futures and options related to the commodities market. Generally, the commodity exchange will maintain a physical location where trading activity takes place. Increasingly, a commodity exchange will also provide online access to trading activity, including the ability to trade on the exchange by electronic means.

Perhaps one of the most well known commodity exchanges in the world today is Commodity Exchange, Inc. located in the Manhattan area of New York City. Known simply as COMEX, the particular commodity exchange has been around for decades and has a solid reputation throughout the investment community. This exchange is particularly well known for metal futures, although COMEX does engage in other commodity options trading.

The basic structure of any commodity exchange will involve creating a platform of standards, rules, and processes that will govern the trading activity of the exchange. All regulations and procedures must be in compliance with the national laws relating to investment trading within the jurisdiction where the commodity exchange is physically located. This means that COMEX is subject to the federal laws and regulations in force in the United States. At the same time, the laws of the nation of Japan govern the Tokyo Commodities Exchange.

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While a commodity exchange is free to engage in trading and futures activity involving any commodities, some exchanges tend to specialize in the types of transactions they support. In some cases, a commodity exchange may focus more on precious metals such as gold or silver. Other exchanges may lean more toward grain and grain products. Still other exchanges may tend to focus more on a broad range of food products as the commodities of choice.

Participation as an investor with a commodity exchange may be done on an individual basis, if the investor can meet the margin requirements set in place by the exchange. Smaller investors may choose to participate by means of a commodity pool, wherein a group of investors pool their resources for trading purposes. Brokers may also be engaged to execute orders on behalf of the individual or pool of investors.

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discographer
Post 3

I was not aware that there were so many commodity exchange centers in the world. I'm reading about it for economics class and I found out that there are more than a handful of commodity exchange centers on every continent. There are about fifteen in Europe alone.

But they don't all trade in everything. Some just trade in agricultural commodities, others in gas commodities, others in metals, etc.

SarahGen
Post 2

@serenesurface-- I'm not sure if traders directly exchange one good for another. I suppose they could but it may not make sense to do so because of the differing prices of commodities. The prices of commodities change all the time. That's why traders invest in futures, because they predict that the price of a commodity will increase in the future and they will make a profit from it.

Commodity exchange is just trade. People buy and sell their commodities. They may buy a commodity to sell at a future date (futures) without ever taking the commodity. Or a trader may buy a commodity in return for a loan to the seller. So there are different ways in which this "exchange" takes place.

serenesurface
Post 1

Although it's called an "exchange," no one is really exchanging commodities in a commodity market are they? People buy and sell commodities but do they actually exchange one commodity for another?

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