The Speculators - FOREX Players Group #1

This is you, a FOREX beginner or currency trader - one of a group of four distinct
foreign exchange market participants.

Your mission if you choose to accept it, is to speculate in the buying or selling of
foreign currency pairs...and through shrewd trading strategy, sound risk
management and trading savvy...make a profit off of fluctuating FOREX currency
rates at the end of a trade.

Individual FOREX speculators like you make up a small but important part of the
huge foreign exchange trading market.

Speculators also include hedge funds. With what can often be massively sized
financial portfolio’s which hedge funds manage, they look to earn equally large to
massive returns off of their FOREX speculation efforts.

Because hedge fund speculators can wield such huge trade leverage in the market,
are often a target for the Central Banks overseeing a countrys' monetary policy, who
want to ensure their trading leverage doesn't cause unwanted ripples in that policy.

An overview of this entire section including its two other parts can be found at
FOREX Trading for Beginners.

The Hedgers - FOREX Players Group #2

Another of the Foreign Exchange Market Participants are large hedgers.

These are large corporations with multi-national operations that span the planet.
Think Proctor & Gamble, Coca-Cola, BASF, etc.

Their worldwide operations entail numerous international financial transactions with

various vendors in any number of countries. And that means having to deal with
many different foreign currencies, all of which fluctuate day-to-day.

An example of a large hedger could be a major global company like United Airlines.
They need to have an ongoing supply of “Jet-A” or jet aircraft fuel to keep their
planes flying and “Jet-A” is one of their largest ongoing costs.

Airlines run on pretty thin profit margins, and they need to hold their costs, like fuel,
down, to ensure profitablity.

For example, if United is buying jet fuel from Canada, and paying in Canadian
Dollars, and the Canadian Dollar was rising against the US Dollar, United could lock
in a lower, current exchange rate today (via a futures contract) for fuel delivery 3, 6
or even 12 months out into the future.
This group of foreign exchange market participants "hedge" or minimizing their risk
of losing money against a rising Canadian Dollar. If the Canadian Dollar did rise
against the US Dollar, and United not hedged, United would have incurred a higher
cost, which could have had a negative impact on their thin profit margins.

That's an example of how a corporate hedger might trade in the FOREX trading
markets.

The Interbank Market – Major Forex Players Group #3

The third major foreign exchange market participant is a group of large commercial
banks and other large financial institutions who make up what’s called the Interbank
Market.

Interbank Market currency trading participants handle FOREX trade transactions with
each other around the globe through electronic brokerage systems.

This Interbank market has a direct impact on what & how you as a speculator
interact in trading the FOREX. How?

The various foreign currency prices you as a trader see on trading platforms are the
result of these large banks and financial firms' foreign exchange trading activity in
the Interbank market as major foreign exchange market participants.

Their activity sets the exchange rates/prices/quotes, as they buy and sell currencies
at the bid/ask price throughout the day.

Central Banks – Big Foreign Exchange Participants

Behind the Scenes
The Central Banks are the fourth group of Foreign Exchange Market Participants that
play in the FOREX space.

In the USA, the Central Bank is the Federal Reserve, comprised of its 13 regional
banks. In other countries it would be a similar Central Bank setup, serving that
specific country and their government.

We don’t see or hear too much about Central Banks as they are more behind the
scenes, and tend to work hand-in-hand with their countries government regarding
monetary policy, etc.

However, they exert a huge influence in when it comes to currency exchange.

One of their main functions is monitoring and helping to set /adjust a countries
monetary policy, helping keep watch over the money supply, interest rates, and
other issues that can affect a countries economic growth, including inflation or
deflation.
You may remember when Allen Greenspan was the chairman of the US Federal
Reserve, for what seemed like forever.

His periodic announcements on the US monetary policy were awaited and held in
such high regard and expectation on Wall Street and across the globe, that news
coming out of his mouth could have a direct and sometimes dramatic impact in
FOREX currency market movements, speaking on behalf of one of worlds most
recognizable Foreign Exchange Participants.

With the 2009 global financial crisis, it became crystal clear that serious financial
issues can span the globe and not just be restricted to a single country.

Thus, foreign government Central banks have taken a greater interest in working
more collaboratively with on global monetary issues that affect the world community,
so that a repeat of such a serious financial meltdown doesn’t occur again.

So, there you have it…a short overview of the major foreign exchange participants.
As noted earlier, you surely realize by now, that there is some incredible talent out
there trading in the ultimate money game called FOREX.

That means, for you to have a chance at success against far more resource-driven
and well-funded Foreign Exchange Market Participants and competitors – including
some of the most brilliant mathematical and trading minds on the planet - you need
to learn as much as you can to improve your currency trading success odds.

Remember, the FOREX market doesn’t care if you win or lose at trading. It will gladly
take your money when you make mistakes, or it can pay you well when you trade
smartly and in an unemotional and disciplined fashion.

Continue to learn and soak up everything about FOREX trading and you could
become a real FOREX player…or at the least, become a winning Foreign Exchange
Market Participant.

Click this link to return to the page top of foreign exchange market participants.

If there was only one currency in the world, there would not have been any need for foreign
exchange market, foreign exchange rates or foreign exchange. But in a world of many national
currencies, the foreign exchange market plays the crucial role of providing the requisite
machinery for making payments across borders, transferring funds and purchasing power from
one currency to another, and determining the exchange rate.

The fundamental changes in foreign exchange, or FX, market began to take form in 1970’s along
with the increasing internationalisation of financial transactions and the change of many
economies into floating exchange rate system from fixed rate system. Over years, these changes
have transformed the foreign exchange market into the world’s biggest and most dynamic market.
The daily turnover of global FX market currently amounts to many trillions of dollars ($1 trillion =
$1000 billion). In majority of these transactions, the U.S. dollar is on the one side.

Most FX market trades involve buying and selling bank deposits denominated in different
currencies. The major instruments used in the FX markets are spot, outright forwards, FX swaps,
currency options, currency swaps, currency futures and exchange traded options.

Four key concepts are important in understanding the basics of the working of this extremely
complex market.

Spot exchange rate: Spot rates are the rates at which different currencies are traded for
immediate exchange.

Forward exchange rate: This is the rate at which foreign currency dealers are willing to commit
to buying or selling a currency in the future. This gives information about the view of market
participants on whether the currency appreciates or depreciates in future.

Appreciation: The rise in the value of one currency relative to another is called appreciation.
When the currency of your country appreciates relative to another country, your country’s goods
prices rise abroad and foreign goods prices decline in your country. This will benefit domestic
consumers who buy foreign goods, but makes domestic businesses less competitive.

Depreciation: A decline in the value of one currency relative to another is called depreciation.
When the currency of your country depreciates relative to another country, your country’s goods
prices decline abroad and foreign goods prices rise in your country. This will benefit domestic
businesses, but will affect domestic consumers who buy foreign goods.

The market exchange rate between two currencies is determined by the interaction of the official
and private participants in the foreign exchange rate market. The official participants include the
central banks and other monetary agencies of the government. The private participants include
banks, other financial institutions, corporates and individuals.

An important concept that drives the forces of supply and demand in the FX market is the Law of
One Price. It says that the price of an identical good will be the same throughout the world,
regardless of which country produces it. Based on this, we can determine the exchange rate
between currencies. For example, if the price of steel produced in the U.S. is $100 per ton and
steel produced in India is Rs. 5,000 per ton, the exchange rate between dollar and rupee would
be Rs.50/$1.

The factors affecting the exchange rates in the long run include relative price levels in each
country, preferences for domestic vs. foreign goods, productivity and government controls. The
buying and selling of currency by the policy makers to control the supply and demand in the FX
market influence exchange rates in countries like India.

FX market in India

As in the rest of the world, in India too, foreign exchange market is the largest financial market in
existence. The phenomenon that has dramatically changed India’s foreign exchange market was
liberalization of economy started during early 90’s. In 1993, central government replaced the
prevailing fixed exchange rate system with a less regulated “market driven” arrangement. Even
though this cannot be called as a fully floating exchange rate system like the U.S., in the Indian
scenario it is working well. In the current system, the Reserve Bank of India and its affiliates
intervene in the market whenever they decide it is necessary.

The major participants in Indian FX market are the buyers, sellers, market mediators and the
authorities. Besides the country’s commercial capital Mumbai, centers for foreign exchange
transactions in India include Kolkata, New Delhi, Chennai, Bangalore, Pondicherry and Cochin.

The FX market in India is regulated by The Foreign Exchange Management Act, 1999 or FEMA,
which replaced the old Foreign Exchange Regulation Act, 1947. Now, the regulators have
introduced several innovations to promote the growth of FX market in India. The introduction of
currency futures in India in 2009 was such as step. This has given the FX market participants in
India a new kind of financial instrument, which is available in developed markets.

Although no one expects the transformation of India to a fully market driven floating foreign
exchange system any time soon, there are many possibilities for further loosening of controls.
The permission for the introduction of new FX derivatives following the path of currency futures is
also expected.

Market participants
Financial markets

Public market

Exchange, organized market

Securities
Bond market
Fixed income
Corporate bond
Government bond
Municipal bond
Bond valuation
High-yield debt
Stock market
Stock
Preferred stock
Common stock
Registered share
 Voting share
Stock exchange
Derivatives market
Securitization
Hybrid security
Credit derivative
Futures exchange

OTC, non organized

Spot market
Forwards
Swaps
Options
Foreign exchange
Exchange rate
Currency

Other Markets
Money market
Reinsurance market
Commodity market
Real estate market
Practical trading
Participants
Clearing house
Financial regulation

Finance series
Banks and Banking
Corporate finance
Personal finance
Public finance
v•d•e

Unlike a stock market, the foreign exchange market is divided into levels of access. At
the top is the inter-bank market, which is made up of the largest commercial banks and
securities dealers. Within the inter-bank market, spreads, which are the difference
between the bid and ask prices, are razor sharp and usually unavailable, and not known to
players outside the inner circle. The difference between the bid and ask prices widens
(from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If
a trader can guarantee large numbers of transactions for large amounts, they can demand
a smaller difference between the bid and ask price, which is referred to as a better spread.
The levels of access that make up the foreign exchange market are determined by the size
of the "line" (the amount of money with which they are trading). The top-tier inter-bank
market accounts for 53% of all transactions. After that there are usually smaller banks,
followed by large multi-national corporations (which need to hedge risk and pay
employees in different countries), large hedge funds, and even some of the retail FX-
metal market makers. According to Galati and Melvin, “Pension funds, insurance
companies, mutual funds, and other institutional investors have played an increasingly
important role in financial markets in general, and in FX markets in particular, since the
early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the
2001–2004 period in terms of both number and overall size” Central banks also
participate in the foreign exchange market to align currencies to their economic needs.

[edit] Banks

The interbank market caters for both the majority of commercial turnover and large
amounts of speculative trading every day. A large bank may trade billions of dollars
daily. Some of this trading is undertaken on behalf of customers, but much is conducted
by proprietary desks, trading for the bank's own account. Until recently, foreign exchange
brokers did large amounts of business, facilitating interbank trading and matching
anonymous counterparts for small fees. Today, however, much of this business has
moved on to more efficient electronic systems. The broker squawk box lets traders listen
in on ongoing interbank trading and is heard in most trading rooms, but turnover is
noticeably smaller than just a few years ago.

[edit] Commercial companies

An important part of this market comes from the financial activities of companies seeking
foreign exchange to pay for goods or services. Commercial companies often trade fairly
small amounts compared to those of banks or speculators, and their trades often have
little short term impact on market rates. Nevertheless, trade flows are an important factor
in the long-term direction of a currency's exchange rate. Some multinational companies
can have an unpredictable impact when very large positions are covered due to exposures
that are not widely known by other market participants.

[edit] Central banks

National central banks play an important role in the foreign exchange markets. They try
to control the money supply, inflation, and/or interest rates and often have official or
unofficial target rates for their currencies. They can use their often substantial foreign
exchange reserves to stabilize the market. Milton Friedman argued that the best
stabilization strategy would be for central banks to buy when the exchange rate is too
low, and to sell when the rate is too high—that is, to trade for a profit based on their more
precise information. Nevertheless, the effectiveness of central bank "stabilizing
speculation" is doubtful because central banks do not go bankrupt if they make large
losses, like other traders would, and there is no convincing evidence that they do make a
profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize
a currency, but aggressive intervention might be used several times each year in countries
with a dirty float currency regime. Central banks do not always achieve their objectives.
The combined resources of the market can easily overwhelm any central bank.[9] Several
scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent
times in Southeast Asia.

[edit] Hedge funds as speculators

About 70% to 90%[citation needed] of the foreign exchange transactions are speculative. In
other words, the person or institution that bought or sold the currency has no plan to
actually take delivery of the currency in the end; rather, they were solely speculating on
the movement of that particular currency. Hedge funds have gained a reputation for
aggressive currency speculation since 1996. They control billions of dollars of equity and
may borrow billions more, and thus may overwhelm intervention by central banks to
support almost any currency, if the economic fundamentals are in the hedge funds' favor.

[edit] Investment management firms

Investment management firms (who typically manage large accounts on behalf of

customers such as pension funds and endowments) use the foreign exchange market to
facilitate transactions in foreign securities. For example, an investment manager bearing
an international equity portfolio needs to purchase and sell several pairs of foreign
currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency
overlay operations, which manage clients' currency exposures with the aim of generating
profits as well as limiting risk. Whilst the number of this type of specialist firms is quite
small, many have a large value of assets under management (AUM), and hence can
generate large trades.

[edit] Retail foreign exchange brokers

Retail traders (individuals) constitute a growing segment of this market, both in size and
importance. Currently, they participate indirectly through brokers or banks. Retail
brokers, while largely controlled and regulated in the USA by the CFTC and NFA have
in the past been subjected to periodic foreign exchange scams.[10][11] To deal with the
issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly
in relation to the amount of Net Capitalization required of its members. As a result many
of the smaller, and perhaps questionable brokers are now gone.

There are two main types of retail FX brokers offering the opportunity for speculative
currency trading: brokers and dealers or market makers. Brokers serve as an agent of the
customer in the broader FX market, by seeking the best price in the market for a retail
order and dealing on behalf of the retail customer. They charge a commission or mark-up
in addition to the price obtained in the market. Dealers or market makers, by contrast,
typically act as principal in the transaction versus the retail customer, and quote a price
they are willing to deal at—the customer has the choice whether or not to trade at that
price.
In assessing the suitability of an FX trading service, the customer should consider the
ramifications of whether the service provider is acting as principal or agent. When the
service provider acts as agent, the customer is generally assured of a known cost above
the best inter-dealer FX rate. When the service provider acts as principal, no commission
is paid, but the price offered may not be the best available in the market—since the
service provider is taking the other side of the transaction, a conflict of interest may
occur.

[edit] Non-bank foreign exchange companies

Non-bank foreign exchange companies offer currency exchange and international

payments to private individuals and companies. These are also known as foreign
exchange brokers but are distinct in that they do not offer speculative trading but
currency exchange with payments. I.e., there is usually a physical delivery of currency to
a bank account. Send Money Home offer an in-depth comparison into the services
offered by all the major non-bank foreign exchange companies.

It is estimated that in the UK, 14% of currency transfers/payments[12] are made via
Foreign Exchange Companies.[13] These companies' selling point is usually that they will
offer better exchange rates or cheaper payments than the customer's bank. These
companies differ from Money Transfer/Remittance Companies in that they generally
offer higher-value services.

[edit] Money transfer/remittance companies

Money transfer companies/remittance companies perform high-volume low-value

transfers generally by economic migrants back to their home country. In 2007, the Aite
Group estimated that there were $369 billion of remittances (an increase of 8% on the
previous year). The four largest markets (India, China, Mexico and the Philippines)
receive $95 billion. The largest and best known provider is Western Union with 345,000
agents globally followed by UAE Exchange & Financial Services Ltd
Commodity markets are markets where raw or primary products are exchanged. These
raw commodities are traded on regulated commodities exchanges, in which they are
bought and sold in standardized contracts.

This article focuses on the history and current debates regarding global commodity
markets. It covers physical product (food, metals, electricity) markets but not the ways
that services, including those of governments, nor investment, nor debt, can be seen as a
commodity. Articles on reinsurance markets, stock markets, bond markets and currency
markets cover those concerns separately and in more depth. One focus of this article is
the relationship between simple commodity money and the more complex instruments
offered in the commodity markets.

See List of traded commodities for some commodities and their trading units and
places.

Contents
[hide]

• 1 History
o 1.1 Early history of commodity markets
• 2 Size of the market
• 3 Recent Trends in Commodities
• 4 Returns
• 5 Spot trading
• 6 Forward contracts
• 7 Futures contracts
o 7.1 Hedging
o 7.2 Delivery and condition guarantees
o 7.3 Standardization
• 8 Regulation of commodity markets
o 8.1 Proliferation of contracts, terms, and derivatives
o 8.2 Oil
o 8.3 Commodity markets and protectionism
• 9 Commodities exchanges
o 9.1 Largest commodities exchanges
• 10 See also
o 10.1 Commodity Exchanges
o 10.2 Supervising Commission

• 11 References

[edit] History

The modern commodity markets have their roots in the trading of agricultural products.
While wheat and corn, cattle and pigs, were widely traded using standard instruments in
the 19th century in the United States, other basic foodstuffs such as soybeans were only
added quite recently in most markets.[citation needed] For a commodity market to be
established, there must be very broad consensus on the variations in the product that
make it acceptable for one purpose or another.

The economic impact of the development of commodity markets is hard to overestimate.

Through the 19th century "the exchanges became effective spokesmen for, and
innovators of, improvements in transportation, warehousing, and financing, which paved
the way to expanded interstate and international trade."[citation needed]

[edit] Early history of commodity markets

Historically, dating from ancient Sumerian use of sheep or goats, other peoples using
pigs, rare seashells, or other items as commodity money, people have sought ways to
standardize and trade contracts in the delivery of such items, to render trade itself more
smooth and predictable.

Commodity money and commodity markets in a crude early form are believed to have
originated in Sumer where small baked clay tokens in the shape of sheep or goats were
used in trade. Sealed in clay vessels with a certain number of such tokens, with that
number written on the outside, they represented a promise to deliver that number. This
made them a form of commodity money - more than an I.O.U. but less than a guarantee
by a nation-state or bank. However, they were also known to contain promises of time
and date of delivery - this made them like a modern futures contract. Regardless of the
details, it was only possible to verify the number of tokens inside by shaking the vessel or
by breaking it, at which point the number or terms written on the outside became subject
to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets.
This represented the first system of commodity accounting.

However, the commodity status of living things is always subject to doubt - it was hard to
validate the health or existence of sheep or goats. Excuses for non-delivery were not
unknown, and there are recovered Sumerian letters[citation needed] that complain of sickly
goats, sheep that had already been fleeced, etc.

If a seller's reputation was good, individual backers or bankers could decide to take the
risk of clearing a trade. The observation that trust is always required between market
participants later led to credit money. But until relatively modern times, communication
and credit were primitive.

Classical civilizations built complex global markets trading gold or silver for spices,
cloth, wood and weapons, most of which had standards of quality and timeliness.
Considering the many hazards of climate, piracy, theft and abuse of military fiat by rulers
of kingdoms along the trade routes, it was a major focus of these civilizations to keep
markets open and trading in these scarce commodities. Reputation and clearing became
central concerns, and the states which could handle them most effectively became very
powerful empires, trusted by many peoples to manage and mediate trade and commerce.
[edit] Size of the market

The trading of commodities consists of direct physical trading and derivatives

trading.The commodities markets have seen an upturn in the volume of trading in recent
years. In the five years up to 2007, the value of global physical exports of commodities
increased by 17% while the notional value outstanding of commodity OTC (over the
counter) derivatives increased more than 500% and commodity derivative trading on
exchanges more than 200%.[citation needed]

The notional value outstanding of banks’ OTC commodities’ derivatives contracts

increased 27% in 2007 to $9.0 trillion. OTC trading accounts for the majority of trading
in gold and silver. Overall, precious metals accounted for 8% of OTC commodities
derivatives trading in 2007, down from their 55% share a decade earlier as trading in
energy derivatives rose.

Global physical and derivative trading of commodities on exchanges increased more than
a third in 2007 to reach 1,684 million contracts. Agricultural contracts trading grew by
32% in 2007, energy 29% and industrial metals by 30%. Precious metals trading grew by
3%, with higher volume in New York being partially offset by declining volume in
Tokyo. Over 40% of commodities trading on exchanges was conducted on US exchanges
and a quarter in China. Trading on exchanges in China and India has gained in
importance in recent years due to their emergence as significant commodities consumers
and producers. [1]

[edit] Recent Trends in Commodities

The neutrality of this section is disputed. Please see the discussion on the talk
page. Please do not remove this message until the dispute is resolved. (May 2009)

The 2008 global boom in commodity prices - for everything from coal to corn – was
fueled by heated demand from the likes of China and India, plus unbridled speculation in
forward markets. That bubble popped in the closing months of 2008 across the board. As
a result, farmers are expected to face a sharp drop in crop prices, after years of record
revenue. Other commodities, such as steel, are also expected to tumble due to lower
demand. This will be a rare positive for manufacturing industries, which will experience
a drop in some input costs, partly offsetting the decline in downstream demand. [2]

[edit] Returns
The neutrality of this section is disputed. Please see the discussion on the talk
page. Please do not remove this message until the dispute is resolved. (January
2010)
This section contains weasel words, vague phrasing that often accompanies
biased or unverifiable information. Such statements should be clarified or
removed. (April 2009)
Studies show that fully-collateralized commodity futures have historically offered the
same return and Sharpe ratio as equities[3]. Commodities have an approximate expected
return of 5% in real terms which is based on the risk premium for 116 different
commodities weighted equally since 1888 (Source Report 219171-Wharton Business
School). Investment professionals often too mistakenly claim there is no risk premium in
commodites.[citation needed]

[edit] Spot trading

Spot trading is any transaction where delivery either takes place immediately, or with a
minimum lag between the trade and delivery due to technical constraints. Spot trading
normally involves visual inspection of the commodity or a sample of the commodity, and
is carried out in markets such as wholesale markets. Commodity markets, on the other
hand, require the existence of agreed standards so that trades can be made without visual
inspection.

[edit] Forward contracts

A forward contract is an agreement between two parties to exchange at some fixed future
date a given quantity of a commodity for a price defined today. The fixed price today is
known as the forward price.

[edit] Futures contracts

A futures contract has the same general features as a forward contract but is transacted
through a futures exchange.

Commodity and futures contracts are based on what’s termed forward contracts. Early on
these forward contracts — agreements to buy now, pay and deliver later — were used as
a way of getting products from producer to the consumer. These typically were only for
food and agricultural products. Forward contracts have evolved and have been
standardized into what we know today as futures contracts. Although more complex
today, early forward contracts for example, were used for rice in seventeenth century
Japan. Modern forward, or futures agreements, began in Chicago in the 1840s, with the
appearance of the railroads. Chicago, being centrally located, emerged as the hub
between Midwestern farmers and producers and the east coast consumer population
centers.

[edit] Hedging

Hedging, a common (and sometimes mandatory[citation needed]) practice of farming

cooperatives, insures against a poor harvest by purchasing futures contracts in the same
commodity. If the cooperative has significantly less of its product to sell due to weather
or insects, it makes up for that loss with a profit on the markets, since the overall supply
of the crop is short everywhere that suffered the same conditions.
Whole developing nations may be especially vulnerable, and even their currency tends to
be tied to the price of those particular commodity items until it manages to be a fully
developed nation. For example, one could see the nominally fiat money of Cuba as being
tied to sugar prices[citation needed], since a lack of hard currency paying for sugar means less
foreign goods per peso in Cuba itself. In effect, Cuba needs a hedge against a drop in
sugar prices, if it wishes to maintain a stable quality of life for its citizens.[citation needed]

[edit] Delivery and condition guarantees

In addition, delivery day, method of settlement and delivery point must all be specified.
Typically, trading must end two (or more) business days prior to the delivery day, so that
the routing of the shipment can be finalized via ship or rail, and payment can be settled
when the contract arrives at any delivery point.

[edit] Standardization

U.S. soybean futures, for example, are of standard grade if they are "GMO or a mixture
of GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin
produced in the U.S.A. (Non-screened, stored in silo)," and of deliverable grade if they
are "GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Iowa, Illinois
and Wisconsin origin produced in the U.S.A. (Non-screened, stored in silo)." Note the
distinction between states, and the need to clearly mention their status as GMO
(Genetically Modified Organism) which makes them unacceptable to most organic food
buyers.

Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley,
pork bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other
livestock, meats, poultry, eggs, or any other commodity which is so traded.

[edit] Regulation of commodity markets

Cotton, kilowatt-hours of electricity, board feet of wood, long distance minutes, royalty
payments due on artists' works, and other products and services have been traded on
markets of varying scale, with varying degrees of success.[citation needed]

Generally, commodities' spot and forward prices are solely dependent on the financial
return of the instrument, and do not factor into the price any societal costs, e.g. smog,
pollution, water contamination, etc. Nonetheless, new markets and instruments have been
created in order to address the external costs of using these commodities such as man-
made global warming, deforestation, and general pollution. For instance, many utilities
now trade regularly on the emissions markets, buying and selling renewable emissions
credits and emissions allowances in order to offset the output of their generation
facilities. While many have criticized this as a band-aid solution, others point out that the
utility industry is the first to publicly address it's external costs. Many industries,
including the tech industry and auto industry, have done nothing of the sort.
In the United States, the principal regulator of commodity and futures markets is the
Commodity Futures Trading Commission.

[edit] Proliferation of contracts, terms, and derivatives

However, if there are two or more standards of risk or quality, as there seem to be for
electricity or soybeans, it is relatively easy to establish two different contracts to trade in
the more and less desirable deliverable separately. If the consumer acceptance and
liability problems can be solved, the product can be made interchangeable, and trading in
such units can begin.

Since the detailed concerns of industrial and consumer markets vary widely, so do the
contracts, and "grades" tend to vary significantly from country to country. A proliferation
of contract units, terms, and futures contracts have evolved, combined into an extremely
sophisticated range of financial instruments.

These are more than one-to-one representations of units of a given type of commodity,
and represent more than simple futures contracts for future deliveries. These serve a
variety of purposes from simple gambling to price insurance.

[edit] Oil

Building on the infrastructure and credit and settlement networks established for food and
precious metals, many such markets have proliferated drastically in the late 20th century.
Oil was the first form of energy so widely traded, and the fluctuations in the oil markets
are of particular political interest.

Some commodity market speculation is directly related to the stability of certain states,
e.g. during the Persian Gulf War, speculation on the survival of the regime of Saddam
Hussein in Iraq. Similar political stability concerns have from time to time driven the
price of oil.

The oil market is an exception. Most markets are not so tied to the politics of volatile
regions - even natural gas tends to be more stable, as it is not traded across oceans by
tanker as extensively.

[edit] Commodity markets and protectionism

Developing countries (democratic or not) have been moved to harden their currencies,
accept IMF rules, join the WTO, and submit to a broad regime of reforms that amount to
a hedge against being isolated. China's entry into the WTO signalled the end of truly
isolated nations entirely managing their own currency and affairs. The need for stable
currency and predictable clearing and rules-based handling of trade disputes, has led to a
global trade hegemony - many nations hedging on a global scale against each other's
anticipated protectionism, were they to fail to join the WTO.
There are signs, however, that this regime is far from perfect. U.S. trade sanctions against
Canadian softwood lumber (within NAFTA) and foreign steel (except for NAFTA
partners Canada and Mexico) in 2002 signalled a shift in policy towards a tougher regime
perhaps more driven by political concerns - jobs, industrial policy, even sustainable
forestry and logging practices.

[edit] Commodities exchanges

Main article: Commodities exchange
[edit] Largest commodities exchanges
Exchange Country Volume per month $M
New York Mercantile Exchange USA 19[4]
Tokyo Commodity Exchange Japan -
NYSE Euronext EU -
Dalian Commodity Exchange China -
Multi Commodity Exchange India -