Back to the Futures: When Were Futures First Traded?
Futures are a cornerstone of financial trading across the globe. In today’s marketplace, futures are traded electronically via well-established exchanges providing convenient and easy access to futures instruments. But where did it all begin? Considering the accessibility of today’s markets, it is easy to lose sight of futures trading’s opportunistic beginnings.
Ancient Origins of Futures Trading
The history of futures trading takes us all the way back to ancient Mesopotamia. In his Code of Hammurabi, the Babylonian king permitted goods and assets to be delivered for an agreed-upon price at a future date. In order to provide a record of these agreements, written contracts were drafted.
The ancient Greeks are also known to have traded futures, as mentioned in Aristotle’s Politics. In this early work, Aristotle conveys the story of Thales, a poor philosopher who secured low prices on the use of olive presses at a future date based on the uncertainty of the upcoming olive harvest. When the plentiful harvest came, Thales was proved correct in his forecast and was able to sell his future use contracts of the olive presses at a much higher price than he paid.
First Formal Futures Exchanges
Fast forward a few thousand years to Japan where the first “modern” futures exchange began in 1710, within the Dojima Rice Exchange. This marketplace was created for farmers to hedge against the possibility of a poor yield by trading rice futures.
Additionally, commodity futures markets were popping up in England throughout the 16th century. Chalk rings were drawn on the floor to serve as a designated “pit” across London coffee houses to facilitate trading. However, it was not until 1877 that the first official commodity trading exchange was founded, the London Metals and Market Exchange. Copper was the first commodity traded within the exchange followed by lead and zinc.
Chicago Board of Trade
Meanwhile, the first official commodity trading exchange in the west was created in 1848, the Chicago Board of Trade (CBOT). The location was a natural choice as Chicago served as an agricultural marketplace & a major railroad hub. The first commodity futures contracts traded in the US were corn, wheat and soybeans. These three grains still account for the bulk of trading at the CBOT today.
New York Mercantile Exchange and Chicago Mercantile Exchange
The New York Mercantile Exchange was established in 1872, originally known as the Butter and Cheese Exchange of New York. The exchange was founded by a group of Manhattan dairy merchants as a means to hedge against the possibility of a less-than-ideal harvest. In 1882, the name was changed to the New York Mercantile Exchange coinciding with the addition of dried fruit, canned goods and poultry.
In 1898, the Chicago Mercantile Exchange (CME) was founded as an agriculture exchange and was first known as the Chicago Butter and Egg Board. Today, the CME has the largest open interest of any futures exchange in the world, offering futures on financial instruments, interest rates, equites, currencies and commodities.
Although first introduced as protection for farmers from a bad harvest, the trading of futures has evolved into a key component of the international financial markets. Combined with modern technology, these versatile instruments can now be leveraged by traders the world over.