Success criteria for commodity exchanges

Abstract

The starting point for this article is the concept of a commodity exchange. A working definition is a physical or – more likely – electronic marketplace for buying, selling and trading commodities, whether ‘hard’ commodities, which typically are natural resources that must be mined or extracted (gold, rubber, oil, etc.), or ‘soft’ commodities, which are mainly agricultural products or livestock (coffee, corn, cotton, sugar, soybeans, etc.). The purpose of the exchange is to provide an organised and reliable marketplace where exchange members can trade commodities on behalf of their clients, which can range from farmers to speculators. Some exchanges trade commodities for spot or forward delivery, whilst others provide futures and options, where deliveries are rare or settlement is in cash (Gross 2014). Most exchanges operate under a national regulatory framework approved by government. Exchanges matter because they act as intermediaries, removing credit risk between their members by interposing themselves between buyers and sellers.