By Philip McBride Johnson
There has been much talk recently of the CME Group's decision to close most of its trading floor as electronic means of executing orders have come into dominance.
As many of us who witnessed the dynamics of floor trading mourn this passing (I was outside counsel to the Chicago Board of Trade for over a dozen years), some observers have also noted the quiet change in terminology from commodity markets to futures or derivatives exchanges (my legal treatise Commodities Regulation, first published in the early 1980s, is now Derivatives Law and Regulation).
It has long been my belief that these markets are permitted - indeed, encouraged - not because they allow speculators to bet on prices but because they promote risk management ("hedging") by those who need such protection while engaged in business across many industries.
Speculators are permitted in order to supply liquidity due to the fact that hedgers will rarely find other hedging counterparties at those moments when risk protection is most needed.
If speculators were the only market participants, the exchanges would likely be shuttered as gambling dens (which are commonly banned under state law as "bucket shops").
In other words, despite the canard that futures markets are venues for "grain gamblers," they provide an invaluable insurance (yes, insurance) service to the business community.
True, they do not pool risk quite like most traditional insurers, but they behave very much like Lloyd's of London where private investors fund the program.