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Futures Technology 1630A 30th St # 365 Boulder, Colorado 80301 1-800-878-6070 303-442-6543 |
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| History of the Commodity MarketsThe fundamental principles that underlie commodity futures trading and the function of commodity exchanges are centuries old. Markets had already attained a degree of formalization in ancient Greece and Rome with a fixed time and place for trading a marketplace, common barter and currency systems, and a practice of contracting for future delivery. The Agora in Athens originated as a commercial marketplace and later became the center of Athenian political and maritime power. The Forum in Rome was initially established as a trading center. At the height of the Roman Empire, 19 such trading centers, called Fora Vendalia (sales markets), served as distribution centers for commodities that the Romans brought from the far corners of the Empire. MEDIEVAL MARKETS Despite the fall of those civilizations, the basic principles of the central marketplace survived the Dark Ages, even though the widespread flow of commerce was disrupted. During feudal times, the scope of trading contracted into scattered local markets. The practice of preannounced markets at fixed times and places reemerged in the form of the medieval fair, arranged b the first trade associations formed by merchants, craftsmen, and promoters who organized regional fairs with the aid of political authorities. Pieds Poudres, or "men of dusty feet," as they were known, traveled from town to town arranging and promoting the fairs. As trading practices became formalized in England, specialization developed. Certain fairs became the focus of trading between the English and Flemish, while others specialized in trade between English and Spanish, Italian, or French merchants. In 1215, the right of foreign merchants to travel freely to and from the fairs in England was established in the Magna Carta. In the 13th century, most trading at the fairs was spot (cash), for immediate delivery; but the practice of contracting for merchandise for later delivery, with standards of quality established by samples, had begun. SELF - REGULATION ARBITRATION In the 18th century, commodity exchanges followed some of the practices of the medieval fair in adopting rules for self-regulation and methods of arbitration and enforcement. The chief contribution of the medieval fair to modern commerce was the formalization of trading practices, which were codified and became known in medieval England as the Law Merchant. This code established standards of conduct acceptable to local authorities. In some cases, standards were minimal, but they formed a basis for common practices in the use of contracts, bills of sale and lading, warehouse receipts, letters of credit, transfer of deeds, and other bills of exchange. Any merchant who violated a provision of the code could be expelled by his fellow merchants. This principle of self-regulation was found in England’s Common Law, was followed in the American colonies, and was later adopted by the individual states. The English merchant associations obtained the right from local and national political authorities to administer their own rules of conduct and established the courts of the fair, also known as the counts of the Pieds Poudres, to arbitrate disputes between buyers and sellers and promptly enforce their judgments with assessments of penalties and awards of damages. By the time these courts received full official recognition by English Common Law courts in the 14th century, their jurisdiction superseded that of the local courts. EARLY COMMODITY MARKETS The regional fairs declined in importance with improvements in transportation and communication and with the development of the modern city. Specialized market centers were developed in their place in many parts of the world. In Europe, these markets were variously called by the names Fourse, Boerse, Beurs, and in Spanish-speaking areas, Bolsa. The word comes from the surname of an 18th century innkeeper, Van der Beurs, whose establishment in Bruges, Belgium, became a gathering place for local commerce. Initially, these markets were held in the open air, usually in town squares. They later moved inside to teahouses and inns, and finally found more permanent locations of their own. The development of the Bourses and Exchanges was not limited to England and Europe. At the same time, similar markets were formed in Japan and the United States. Japan’s commodity exchanges date to the 1700’s and preceded her securities markets by nearly a century and a half. This pattern is generally the reverse of that in Europe, England, and the United States, where securities markets usually predated commodity markets. Spot, or cash, trading in rice, the most widely used staple food in Japan, dates from the early 1700’s and forward contracting in rice on the Osaka Rice Exchange was legally recognized in 1730. Forward contracting is a transaction in which buyer and seller agree upon payment for and delivery of a specified quality and quantity of goods at a specified future date. Though there were as many as eight commodity exchanges in major Japanese population centers, the Osaka market was the largest. There were also Japanese markets for edible oils, cotton, and precious metals, though their trading volume was small in comparison with that for rice. U.S. COMMODITY MARKETS As early as 1752, there was an exchange in New York for trading in domestic produce. A series of small markets developed in New York and in other cities. While none of these markets exists today, they are the foundations for several of the present New York commodity exchanges. These early markets served other functions in addition to that of providing a place for trading. They attracted diverse business interests, brokers, ship owners, financiers, and speculators with risk capital, as well as primary producers and users of commodities. The early commodity markets existed primarily for cash transactions with immediate delivery. They greatly enhanced the ease and scope of trade in all types of commodities - food and foodstuffs, textiles, hides, metals, and lumber. However, the practices of spot trading and forward contracting were not adequate to meet the problems of the sudden shifts in supply, demand and consequently, price that had always vexed producers of basic commodities. SUPPLY / DEMAND CHAOS In the early 1800’s, it was common for farmers to bring grain and livestock to regional markets at a given time each year. They often found that the supply of meat and grain far exceeded the immediate short-term needs of packers and millers. These processors, seeing more than adequate supplies, would bid the lowest price. Often, the short-term demand could not absorb the glut of commodities at any price, however low, and goods were dumped in the street for lack of buyers. The marketing situation in Chicago was particularly aggravated by the lack of adequate storage and transportation facilities. Throughout most of the year, snow and rains made the dirt roads from country farmlands to the city impassable. Once the commodities reached the city, buyers were faced with the problem of inadequate storage space. Underdeveloped harbor facilities impeded the shipment of grain to eastern markets and the return movement of needed manufactured goods to western cities. The commodity exchanges, when they were organized, recognized the great need for improved transportation and storage and were a major force behind legislative efforts to improve rural roads, build inland waterways, and expand storage and harbor facilities. The exchanges made a particular contribution in leading the way to the establishment of accepted standards of grades and measures. These efforts often bogged down in financial and legislative failure and the dismal marketing situation continued. The glut of commodities at harvest time was only part of the problem. Inevitably, there were years of crop failure and extreme shortages. Even in years of abundant yield, supplies were exhausted, prices soared, and people went hungry several months after the fall harvest and marketing of grain and livestock. Businessmen could be faced with bankruptcy because they lacked raw materials to keep their operations going. In this situation, the rural population, though having sufficient food for themselves, had crops they couldn’t sell, and therefore, did not have the income to pay for needed manufactured products - tools, building materials, textiles. EMERGENCE OF FUTURES CONTRACTS Imaginative men rarely tolerate such conditions for long. Some farmers and merchants had already begun to make contracts for forward delivery. This at least assured them of having a seller or buyer for their commodities. This practice of forward contracting was used in Chicago shortly after the city was founded in 1833. In 1848, a group of 82 men representing broad business interests formed the Chicago Board of Trade. Forward contracting, as well as cash trading, was practiced on the new Exchange. The problems of supply and demand were compounded by the Civil War. This stimulated the development of futures contracts. Forward contracting solved the basic problem of finding a buyer for the seller and vice versa. It could, however, do nothing to control the financial risk that occurred with unforeseen price changes resulting from crop failures, loss of ships, inadequate storage and transportation, or economic factors. Hedging in futures developed to minimize pure risk. Although most records were destroyed in the Great Chicago Fire of 1871, it is generally agreed that futures contracts were in use on the Chicago Board of Trade in the 1860’s. FORMATIVE YEARS The late 1800’s were critical years to the scope and efficiency of futures trading. In this period, trading practices were formalized and standardization of contracts, rules of conduct, clearing and settlement procedures were established by the exchanges. Representing the diverse economic interest of their membership, the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade.
The Rules and Regulations of the different Commodity Exchange should be consulted as the authoritative source for information, rules and contract specifications. PLEASE NOTE THAT THERE IS AN INHERENT RISK OF LOSS ASSOCIATED WITH TRADING FUTURES AND OPTIONS CONTRACTS. EMPLOYEES OF FUTURES TECHNOLOGY, LLC PROVIDE INFORMATION BASED ON SOURCES WE CONSIDER RELIABLE, BUT THERE IS NO GUARANTEE THAT THE INFORMATION WE PROVIDE WILL RESULT IN PROFITABLE TRADES. PLEASE CAREFULLY CONSIDER YOUR FINANCIAL CONDITION BEFORE INVESTING IN FUTURES AND OPTIONS CONTRACTS. FUTURES TRADING IS NOT SUITABLE FOR ALL INVESTORS. PAST PERFORMANCE IS NOT NECESSARY INDICATIVE OF FUTURE RESULTS. This Site is Designed, Built and
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