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A BRIEF HISTORY OF FUTURES MARKETS

Although vestiges of futures markets appear in the Japanese rice markets of the 18th century and perhaps even earlier, the mid-1800s marked the first clear origins of modem futures markets. For example, in the United States in the 1840s, Chicago was becoming a major transportation and distribution center for agricultural commodities. Its central location and access to the Great Lakes gave Chicago a competitive advantage over other U.S. cities. Farmers from the Midwest would harvest their grain and take it to Chicago for sale. Grain production, however, is seasonal. As a result, grain prices would rise sharply just prior to the harvest but then plunge when the grain was brought to the market. Too much grain at one time and too little at another resulted in severe problems. Grain storage facilities in Chicago were inadequate to accommodate the oversupply. Some farmers even dumped their grain in the Chicago River because prices were so low that they could not afford to take their grain to another city to sell.
To address this problem, in 1848 a group of businessmen formed an organization later named the Chicago Board of Trade (CBOT) and created an arrangement called a “to-arrive” contract. These contracts permitted farmers to sell their grain before delivering it. In other words, farmers could harvest the grain and enter into a contract to deliver it at a much later date at a price already agreed on. This transaction allowed the farmer to hold the grain in storage at some other location besides Chicago. On the other side of these contracts were the businessmen who had formed the Chicago Board of Trade.
It soon became apparent that trading in these to-arrive contracts was more important and useful than trading in the grain itself. Soon the contracts began trading in a type of secondary market, which allowed buyers and sellers to discharge their obligations by passing them on, for a price, to other parties. With the addition of the clearinghouse in the 1920s, which provided a guarantee against default, modem futures markets firmly established their place in the financial world. It was left to other exchanges, such as today’s Chicago Mercantile Exchange, the New York Mercantile Exchange, Eurex, and the London International Financial Futures Exchange, to develop and become, along with the Chicago Board of Trade, the global leaders in futures markets.