Future & Commodities Trading
In the 1840s, Chicago had become a commercial center with railroad and telegraph lines connecting it with the East. Around this same time, the McCormick reaper was invented which eventually lead to higher wheat production. Midwest farmers came to Chicago to sell their wheat to dealers who, in turn, shipped it all over the country.
He brought his wheat to Chicago hoping to sell it at a good price. The city had few storage facilities and no established procedures either for weighing the grain or for grading it. In short, the farmer was often at the mercy of the dealer.
1848 saw the opening of a central place where farmers and dealers could meet to deal in “spot” grain-that is, to exchange cash for immediate delivery of wheat.
The futures contract, as we know it today, evolved as farmers (sellers) and dealers (buyers) began to commit to future exchanges of grain for cash. For instance, the farmer would agree with the dealer on a price to deliver to him 5000 bushels of wheat at the end of June. The bargain suited both parties. The farmer knew how much he would be paid for his wheat, and the dealer knew his costs in advance. The two parties may have exchanged a written contract to this effect and even a small amount of money representing a “guarantee.”
Such contracts became common and were even used as collateral for bank loans. They also began to change hands before the delivery date. If the dealer decided he didn’t want the wheat, he would sell the contract to someone who did. Or, the farmer who didn’t want to deliver his wheat might pass his obligation on to another farmer. The price would go up and down depending on what was happening in the wheat market. If bad weather had come, the people who had contracted to sell wheat would hold more valuable contracts because the supply would be lower; if the harvest were bigger than expected, the seller’s contract would become less valuable. It wasn’t long before people who had no intention of ever buying or selling wheat began trading the contracts. They were speculators, hoping to buy low and sell high or sell high and buy low.
There are also smaller exchanges that specialize in one particular futures class, such as Euro US which focuses on contracts that compare international currencies. As more speculators entered the markets, exchanges look for ways to facilitate more trading. With the evolvement of technology, exchanges can now link together, expanding the number of transactions. Exchanges all over the world are connected through systems that automatically enter an order placed on one exchange but executed on another. And trading is no longer limited to daytime operations. In 1992 an electronic platform called Globex began, offering 24-hour trading for many futures. This move extended futures trading to a limitless, around-the-clock practice, which broadened interest further in trading commodities and futures contracts. Interest has grown so much that the entire markets themselves are now traded as indexes by speculators.