The history of futures exchanges and how they work today

You might be surprised to find that futures trading has been in existence since the 18th century. In the Far East, the Japanese Dojima Rice Exchange is said to be the first example of a futures exchange, whereby traders across Japan would trade the future price of this precious food commodity.

Although commodities futures trading is also said to have occurred in England within the 16th century, it wasn’t until 1877 that the country established its first futures trading exchange – the London Metals and Market Exchange.

The US blazed a trail for futures exchanges

Even the United States had a futures trading exchange sooner than London, with the Chicago Board of Trade (CBOT) established in 1848. The CBOT helped link the agricultural hubs of eastern America, namely Chicago and New York. Wheat, corn and soya beans were some of the first commodities traded using futures contracts stateside. All three of these remain some of the most popular commodities among futures traders today at the CBOT.

The cotton trade then attracted a new wave of futures exchanges in the mid-19th century. The New York Cotton Exchange (NYCE) was founded in 1870, which also helped to pave the way for more futures contracts to be traded across commodities like sugar and cocoa. Amplified production of cattle across the US also resulted in the trading of pork and cattle futures contracts too. 

The NYCE was an inspiration to cotton producers worldwide, especially in India. The thrill of anticipating the opening and closing numbers of the cotton rates received at the Bombay Cotton Exchange from the NYCE spawned a game known as Matka. 

Although the use of Matka to predict the city’s cotton exchange was banned in 1961, the game is still popular today in a different guise, based on a lottery-style format in which players are tasked with guessing two randomised numbers from one to nine. For this, the way in which the numbers are drawn was modified, mainly due to the influence of Pakistani Ratan Khatri, the so-called Matka King. In this sense, Khatri proposed to write the chosen numbers on pieces of paper and then draw them from a Matka, a specific type of pot. Interestingly enough, despite these changes, the original term Matka has survived until today is still widely used.

The story of the CME and NYMEX and their eventual merger

During the early 1920s, the Chicago Mercantile Exchange (CME) was formed as a reconstitution of the Chicago Butter and Egg Board. A host of additional futures contracts were traded on the CME as the decades ticked by, including silver, live cattle, foreign exchange and even US Treasury bond futures. The New York Mercantile Exchange (NYMEX) also broadened its horizons, even extending to futures trading of stock market indices.

Futures exchanges moved into another stratosphere in the early 1990s when the CME launched its fully electronic Globex futures platform. It was the beginning of the end for pit-based floor trading, kick-starting the shift towards exclusively digital futures trading. As of 2007, the CME merged with the CBOT to establish a new CME Group. A year later, CME Group took control of the NYMEX in a bid to create an overarching futures exchange for US-based commodity traders. In doing so, the acquisition of NYMEX enabled CME Group to offer new energy and metals futures and further enhance its futures product portfolio. The end result is more real-world futures trading opportunities that offer less volatility than next-generation trading instruments like Bitcoin or so-called meme stock equities that see retail traders take on short sellers head-on.

At the time of writing, futures exchanges are still thriving. A host of exchanges trade tens of millions of futures contracts across a broad spectrum of asset classes via the CME Globex platform. With fully digital futures exchanges, traders can execute orders into the market with ultra-fast precision.

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