In theory, the commodity futures markets are the essence of competition. All orders are required to be exposed to trading pits where traders vie competitively and aggressively to assure the best possible execution price. On the surface, as observed from the exchange galleries or on television, the exchanges do appear to be highly competitive, particularly when one views hundreds of traders screaming and gesticulating wildly for orders. The now famous sting operations on the Chicago exchanges in 1989, however, have provided dramatic evidence that a dangerous symbiotic relationship has developed among traders on the floor that is undermining competition and threatening the integrity of the system. When these non-competitive arrangements are coupled with the fact that floor traders enjoy a decided time and place advantage over all persons off the floor, and since by law all orders must come to the floor for execution, the market loses its surface aura of maximum competition. Instead, the exchanges may rightly be viewed as having a statutory monopoly that is undermining competition in the futures industry at the expense of the public. That statutory monopoly should be broken and effective floor trading practices and procedures should be established in order to prevent the type of conduct that was exposed by the Chicago sting operation. This article will describe the background of futures regulation and the role now being played by futures trading in the financial markets. The article will then discuss and propose reforms that are needed to assure effective regulation. Specifically, Part I of the article will discuss the present regulatory scheme under the Commodity Exchange Act. This part includes a discussion of the regulatory background of futures trading, and it describes statutory provisions that are designed to prevent fraud and trading abuses. Part I of the article also discusses some of the numerous regulatory problems and concerns that the government has faced in the futures markets, and it reviews some of the more abusive trading practices that have been uncovered by the Chicago sting operation. Part II of the article focuses on a core provision in the Commodity Exchange Act that requires futures instruments to be traded on licensed “contract markets.” Part II suggests that the solution to many of the present regulatory shortcomings is to loosen this statutory monopoly so that competition may operate more fully. This approach will assure that the marketplace, and not artificial regulatory barriers, determines whether particular commodity interests are traded on the exchanges. Part II also proposes that public representation be required on the boards of the exchanges as well as their committees so that the power of the exchanges, which has long been used to block regulatory reforms, is diluted.Part III discusses some other shortcomings in the present regulatory system that have fostered and encouraged the abuses exposed by the Chicago sting operation. This part also addresses some gaps in the Commodity Exchange Act that prevent effective regulation and it proposes reforms in the manner in which futures trading is conducted on the floors of the exchanges so as to assure maximum competition and efficiency.
Jerry W. Markham, The Commodity Exchange Monopoly--Reform is Needed, 48 Wash. & Lee L. Rev. 977, 1036 (1991).