Futures Past

utures and options trading in the United States began in the mid-1800s, when the industrial revolution and new technology transformed subsistence farming into national businesses involving commodity production, storage, transportation and food processing. The Chicago Board of Trade was founded by 82 merchants in 1848 as a nonprofit centralized marketplace for cash grain sales. The Kansas City Board of Trade opened in 1856. But neither farmers nor food processors were satisfied with selling grain only at harvest time. Food processors found it a burden to store grain for use all year and farmers were disturbed that prices were low in the first three months after harvest, when there was a glut, and much higher later in the year, when shortages often developed. Because most grain was harvested within a short period, farmers began to "forward contract" a specific amount of grain for delivery at a future date.

Forward contracts did not specify a price and did nothing to control the risk of rapid and unpredictable price changes due to crop failures or inadequate storage. The need for price protection led the Chicago Board of Trade in 1865 to develop futures contracts-standardized agreements to deliver a set quantity of grain at a set price at a set place within a certain period of time. The New York Cotton Exchange was founded in 1870 to allow speculators to assume the price risk during shipping. The cotton owners "hedged" their risk of price fluctuations by selling speculators futures contracts at high prices if cash prices were low, and vice versa. The Minneapolis Grain Exchange was founded in 1881 as both a cash and futures exchange for agricultural production in the Upper Midwest.