“A commodities exchange is a legal entity that determines and enforces rules and procedures for trading standardized commodity contracts and related investment products.”
A commodities exchange also refers to the physical centre where trading takes place. The commodities market is massive, trading more than trillions of dollars each day.
1. Contracts entered through exchange. Each one deals with the exchange
2. Scientific and time tested risk control mechanism in place and each party’s liquidity risks are assumed by the exchange.
3. Formalized environments with appropriate limits related to open interest and positions thereby safeguarding the interests of all players big and small.
4. Governed by the regulatory authority in charge of financial markets.
5. Pre-defined contracts and contract lots – can prove to be rigid in some cases
6. Accurate hedge is not possible with the help of futures market.