New York Board Of Trade

What Is New York Board Of Trade (NYBOT)?

The New York Board of Trade (NYBOT) is a New York, USA, commodity futures exchange. It is recognized for facilitating trading in various financial instruments, including currencies, interest rates, market indexes, and commodities like coffee, orange juice, sugar, cotton, and cocoa.

Founded in 1870, the NYBOT initially relied on human traders for conducting physical commodity trading. However, with the progress of technology and innovations, a significant portion of trading is now carried out electronically and digitally using computers. The NYBOT employs brokers who operate on trading floors, facilitating the buying and selling diverse financial instruments.

• New York Board of Trade (NYBOT) is a futures commodity exchange in the United States.
• It trades cocoa, coffee, sugar, orange juice, cotton, currencies, commodities, and financial instruments.
• The NYBOT requires a 5% post-trade margin to execute the trade. And so they only pay 5% of the total contract value.
• In futures contracts, investors are typically not buying commodities but trading contracts to control the underlying asset. In reality, only the cash is exchanged.

New York Board Of Trade Explained

The New York Board of Trade is an electronic marketplace specializing in commodity trading, futures, and option contracts. Not every asset can be traded on a regular stock market, so specific exchanges are established by the US government where traders interested in trading commodities buy and sell currencies and physical commodities along with other financial instruments.

An investor with a specific amount of physical commodity, whether orange juice, cotton, or coffee, sells it through futures contracts, with a particular delivery date in the future and at a predetermined price. When the date arrives, the buyer must purchase the commodity at the set price. At the time of price determination, the fixed price was high, and by the time of delivery, it decreased, but then the seller realized the gap as profit and vice versa.

It is not limited to only agricultural commodities. Metals, crude oil, gold, silver, or natural gas are also traded on the NYBOT exchange, including currencies, interest rates, and other financial instruments. The Intercontinental Exchange owns the NYBOT and is identified as a subsidiary of ICE. The same American holding company owns the New York Stock Exchange (NYSE) and is listed on the same as ICE. The transactions are quick and done swiftly through digital networks, encouraging people to participate in commodities and derivatives.

History

The New York Board of Trade was founded in 1870. It is located in New York City and was run manually by employed brokers. In 1997, it acquired the Coffee, Sugar, and Cocoa Exchange (CSCE) and expanded its trade operations and facilities. The trading floor of the NYBOT falls under the US Commodity Futures Trading Commission's authority, a separate federal agency of the American government.

The floors of the NYBOT were operated with the open cry system through hired brokers, and it kept on running like that for more than a hundred years. Only after 2006, when the Intercontinental Exchange bought the whole joint and named it ICE Futures US, it became operational in 2007 with electronic communication networks shutting down the entire floor and replacing the hired brokers. Currently, the NYBOT under ICE operations as a digital and electronic exchange linked directly to companies, individual investors, and traders.

Examples

Here are the examples of trading in the NYBOT -

Example #1

Suppose Steve is an investor and deals in commodity trading for coffee. Since it is an agricultural commodity, he cannot list it as a stock on the stock exchange, and therefore, he participates in futures contracts through the New York Board of Trade. He finds a company that requires coffee for his business purposes, and hence they both enter into a trade of coffee by a futures contract.

There were large trading floors when the NYBOT was a separate entity, and the whole trading process was conducted by humans only. Still now, under the ICE, the entire process is digitalized. As per the contract, Steve will deliver the buyer a certain amount of coffee at a predetermined price on a set price in the future. When the delivery date comes, Steve provides the coffee in exchange for cash, as was decided in the contract. It is a simple example of NYBOT. The whole trading process was done under the NYBOT and its regulations through electronic and digital means.

Example #2

In another example, suppose a healthcare and medical research company that forecasts a massive requirement of cotton in the future and plans to buy it before time; they take the help of WebICE, the online trading platform, as a buyer to enter into a futures contract, as a purchaser they are required to submit 5% post margin trade of the entire contract value.

The company finds a seller with the right amount of cotton and enters into a futures contract with it; the agreement sets a preset price and a delivery date of six months. By the time of delivery, the cotton's spot price was highly inflated. Still, since the company had already bought it at a set price, they protected themselves from spot price contingencies, fluctuation, and volatility issues.

In any given futures contract, a broker is mentioned as an interested party; if any of the two trading parties defaults to oblige or make payments, they shall face legal consequences; the court may appoint a debt collection agency to collect fees or seize property to cover it. The other party can sue the defaulting party for a contract breach without a broker.

Importance

The importance of the New York Board of Trade is -

1. The NYBOT is a separate market for futures and options contracts.
2. It is identified as a trading platform for commodities that are generally not traded on a typical stock exchange, like cocoa, cotton, and orange juice. Therefore, people dealing in commodities can achieve leverage.
3. An exchange often receives too many orders, but buyers and sellers must be present for a trade order to be successfully executed. Still, when only one type of order is placed, it creates a market imbalance that the NYBOT addresses.
4. The NYBOT has successfully increased trade volumes and market size with digitalization.
5. Agricultural commodities have high price volatility; hence, the NYBOT works to safeguard both the buyer and seller.

Frequently Asked Questions (FAQs)

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