Today’s futures markets are technologically sophisticated global marketplaces, trading at high speeds on electronic platforms, around the globe, nearly 24 hours a day. But did you know that futures trading traces back to ancient Greek and Phoenician merchants, who transported their goods for sale around the known world, opening deep and lasting global interconnections based on trade?

Modern, electronic, globally traded futures markets have their origins in the Nineteenth-Century United States, as increasing agricultural production and consumption necessitated a central market for delivery, sale, and purchase, and eventually price discovery and payment and quality guarantees.

Early History

Early Nineteenth-Century U.S. agricultural producers and consumers were subject to drastic seasonal and supply fluctuations, repeated gluts and shortages, and chaotic price fluctuations. During this time, storage facilities were primitive, markets were disorganized, and production was unpredictable. In this climate, hubs of agricultural commerce began to emerge in Buffalo, New York, for example, and other cities located around navigable U.S. waterways, enabling a central, stable market for regional producers and consumers.

By 1848, the completion of canal and railroad infrastructure centered around Chicago linked the Great Lakes with the Mississippi River, and Chicago became a key hub for agricultural commerce.

Chicago Board of Trade

During this time the Chicago Board of Trade (CBOT) formed, which would become the preeminent grain exchange in the United States. The establishment of a central grain exchange allowed farmers and grain producers to sell their crops at set prices throughout the months between harvests, and allowed consumers to purchase grains at transparent prices throughout the year.

After an initial period providing trading in forward contracts, the CBOT introduced standardized futures contracts in 1865. These centrally cleared contracts, secured with the payment of performance bond or margin payments by clearing members, introduced a level of reliability and security to buyers and sellers that stabilized markets against the possibility of default.

Chicago Mercantile Exchange

The Chicago Produce Exchange was established in 1874 as a dedicated exchange for the cash trade of butter and eggs, with defined product grades and rules of trade. To ensure quality, each keg of butter was individually smelled and tasted on the spot, and a price agreed upon. Surplus butter was salted and stored in the basement for future sale, which drove the introduction in 1882 of the “time contract”. In 1898, members of the Chicago Produce Exchange formed the Chicago Butter and Egg Board.

Following World War I, in 1919, the Chicago Butter and Egg Board reconstituted as the Chicago Mercantile Exchange (CME), to form an organization to permit public participation under carefully supervised commodity trading regulations.

Throughout the 20th century, additional innovative futures contracts were introduced by the Chicago exchanges including:

• CBOT Frozen Pork Bellies futures
• CME Live Cattle futures
• CBOT Silver futures
• CME Foreign Exchange futures
• CME cash-settled Eurodollar futures
• CME S&P 500 index futures
• CBOT U.S. Treasury Bond futures

In 1992, futures contracts began trading electronically on the CME Globex platform, beginning the transition from pit-based floor trading to the electronic platform.

CME Group

In 2007, the Chicago Board of Trade and Chicago Mercantile Exchange merged to form CME Group. Then in 2008, CME Group acquires NYMEX, adding energy and metals to its wide array of product offerings. Today, tens of millions of contracts from multiple global exchanges are traded daily across all asset classes on CME Globex with millisecond timestamp precision.

Summary

The fundamental benefits resulting from the growth and innovation of the original Midwest grain futures markets remain the foundation and driving principal of electronic trading:

• Risk Management
• Transparency
• Price Discovery
• Liquidity
• Security