Futures are an odd thing to trade when you really think about it. You aren’t buying or selling the commodity itself in a big market, but instead you’re essentially trading the value you expect goods to have in the future. Where did this come from? Why do people trade futures like this? As it turns out, the history of futures dates back to the very beginning of civilization.
Beginnings In Babylon | Delta Trading Group
The Code of Hammurabi is famous for being one of the very first set of laws written down in clay and stone. On these tablets you can find the origins of contract law: under the Code, a merchant can pay a farmer today and get their harvest later. If it’s a big harvest the merchant saves money, but if it’s a bad harvest the farmer gets the better deal.
Greek merchants used the same system. In his Politics, Aristotle describes a philosopher who bought the future use of olive presses at a low price. The olive harvest turned out great, so the philosopher made a profit by selling his press contracts.
A Formalizing System | Delta Trading Group
As the Age of Sail opened up world markets and commodities to European merchants, these merchants started speculating on the value of these goods based on questions like how good the harvest would be, how much the merchants could get from locals, and how well the goods would do in European markets. Cafes and markets in England started setting up designated “pits” where merchants could buy and sell futures contracts, and even isolated countries like 18th century Japan had rice exchanges where farmers could hedge against bad harvests by offering and trading future contracts.
The First Futures Markets | Delta Trading Group
With futures trading taking place across London, someone realized that there was an opportunity to create a centralized exchange where merchants, investors, and producers could all come together to create and trade futures contracts. In 1877, the London Metals and Market Exchange became the first official commodity futures exchange in the United Kingdom. Just as the name explains, the first futures traded at this market were for copper, lead, and zinc.
In the United States, the Chicago Board of Trade beat the London Metals and Market Exchange by nearly 30 years by opening its doors in 1848. Chicago was a natural hub for commodity trading thanks to its status as the unofficial capital of the Midwest, the breadbasket of the United States. As such, the first commodities traded here were corn, soybeans, and wheat, and the three crops still dominate the CBOT today. The New York Mercantile Exchange opened in 1872, but its cousin the Chicago Mercantile Exchange is the biggest open-interest futures exchange in the world.
Trading the future value of goods is as old as contract law. Good and bad harvests, strong and weak businesses, all kinds of uncertainty can change future values and futures trading helps protect producers against the future. Meanwhile, a smart trader can make a bundle by knowing which futures contracts to trade and when.