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Show hoes Chicago Board Of Trade Set Commodity Prices? jjiibatE.Goldberg,Cbairman Chicago Board of Trade The Chicago Board of Trade CBOT), the world's largest id oldest futures exchange, i the responsibility to meet uin needs of U.S. and 1 wld agricultural and finan- I a markets. This we do by II aiding a centralized trad-3j trad-3j facility and product offer-jgs offer-jgs that provide commercial J jucriis and individuals with 0 ls to manage the risk as-). as-). joated with their business. ! Futures markets exist iere are 12 exchanges in the n i'i and a growing number jbroad-because there is a md to offset risk associated nth commodities in con-3 con-3 rtantly changing economic , Bvironments. Hedgers turn j u the futures markets stause they want to reduce ,L iii uncertainty. Speculators In in the markets because by 0. assuming this risk, profit :pportunitie8 exist. Together, hedgers and speculators ln nate a liquid, efficient mar-'r mar-'r iftplace. Without either (rap, the market would not J' function. 1 Occasionally, the CBOT faces criticism from farmers 5 feliwgramprices...andfrom i- nnsumers for high grain '21 prices. Earlier this year, this mticism took the form of a I demonstration outside our building by about 200 farmers "o' mil their families who felt that the exchange was un-J un-J Hy "keeping prices too Im." We always explain in these litustions that the CBOT it- , self does not "set" prices; it Ms as a barometer, register-iil register-iil the worldwide influences "I supply and demand. The uihange is merely the meet-3 meet-3 place the facilities, the Oology, the rules that buyers and sellers to together and compete in "pen-auction market. (!t let's take that a step r and examine the -1 apply and demand" factors j ,J! influenced farm com-j com-j -Ml prices during the past i tuple of years. leyear 1983 was one of antruti and extreme uncer-It uncer-It began with the W carryover stocks ever "Pmenced in the U.S. 2's carryover was 3.4 bil-;i bil-;i bushels); it ended with ' ; W corn and soybean I J '.'"fit in many years 1 ;n nop size was half the ' :f'8).Itbeganwitha ; y strong dollar; it i with the value of the The CBOT strives to prevent pre-vent market manipulation in two ways. First, an extensive market surveillance program monitors trading to detect abnormal price behavior And the CBOT has four disciplinary dis-ciplinary bodies (Floor Governors, Gov-ernors, Business Conduct, Floor Conduct, and the Board of Directors) that have the authority to impose fines and suspensions for violation of exchange rules. Second, exchanges deliberately deliber-ately design futures instruments instru-ments to minimize vulnerability vulnera-bility to manipulation. Because Be-cause manipulation decreases de-creases the effectiveness of the futures markets by discouraging dis-couraging hedging and risk transference, both types of self-regulation benefit the exchange ex-change through positive effects ef-fects on trading volume. Diligent self-regulation also carries much wider implications. implica-tions. Greater trading volume provides greater market liquidity. liq-uidity. When more people are in the markets, the bid and ask spreads narrow, thus lowering transaction costs. Therefore, it is in the interest of the CBOT and its members to prevent market manipulation manipula-tion through consistent self-regulation. The CBOT prides itself on the expertise of its Office of Investigations and Audits. This 70-member 'watchdog' department is the largest in the industry. It has a sophisticated sophis-ticated computer monitoring system to detect possible trading abuses and to backup back-up a large-trader reporting system. This investigative department conducts regular, on-site examinations of member mem-ber firms and was the first to initiate a training program for new auditors. The risk of fluctuating prices pri-ces faced by producers and buyers of farm commodities will be an economic fact of life as long as we must cope with variations in weather conditions, condi-tions, export demand, interest inter-est rates, government policy and the value of the U.S. dollar. dol-lar. The Chicago Board of Trade, as a public marketplace, market-place, provides an efficient place for buyers and sellers to meet and competitively discover dis-cover prices. We are committed to preserving pre-serving the integrity of the marketplace as a price-discovery medium. Because it is not only in the public's best interest to do so, but also in ours. Goldberg dollar appreciating at an increasing rate against currencies cur-rencies of our grain trading contemporaries. Weather conditions con-ditions vacillated from spring moisture, to extreme summer drought, and back to a wet fall. These and other fundamental funda-mental variables influenced supply and demand factors and were directly reflected in prices. Corn and soybean futures prices efficiently tracked the cash market throughout these fluctuations. Consequently, Conse-quently, the summer drought conditions caused prices to rise beyond the point of affordability for most grain importing nations, and the ill health of foreign economies and currencies resulted in limited global grain demand. Meanwhile, predictions for a large crop in 1984, coupled -with large stocks of grain (production from 1983 and surplus from 1982) further eroded prices for U.S. crops. The continued strength of the dollar against foreign currencies cur-rencies reduced exports significantly. sig-nificantly. It was those factors abundant supplies, reduced export demand and the strong U.S. dollar that kept farm commodity prices low in 1984 and continue to exert downward pressure on them today. Many times, as our critics expressed concern over the current level of prices, they also uttered the word "manipulation" "man-ipulation" in the same breath. We view this as a serious allegation. alle-gation. As prescribed by Congress, approved futures markets such as the CBOT must preserve pre-serve the integrity of the marketplace mar-ketplace by preventing and detecting market manipulation. manipula-tion. The regulation of trading trad-ing practices is, therefore, primarily up to each exchange ex-change with assistance from the Commodity Futures Trading Trad-ing Commission (CFTC). |