History of Futures Trading

Futures trading has become one of the world’s primary forms of derivative trading, with countless billions traded in futures contracts worldwide every single day.  From futures exchanges in London to New York, from Toronto to Tokyo, futures trading is cemented in the mindset of trading fund managers and private investors, and as a result its significance in financial markets continues to increase.

But futures trading hasn’t always been a ready-made, ‘part-of-the-furniture’ investment.  In fact, futures have developed over a long period of history as devices for security of trade and as a means to quickly raise cash from existing assets, and their back-story is one that can be traced for thousands of years to the ancient civilisations of Rome and China, and even earlier in a less sophisticated form.

One of the earliest references to futures trading that has been discovered dates from Babylonian times, and takes the form of livestock-shaped tokens, discovered alongside dates promised and actual for delivery.  While obviously a highly simplified version of the futures contract, these agreements to trade assets at a specified future point were the beginnings of the futures derivative we know and trade today.

The Chinese civilisations dating back to 4000BC were also involved in trading futures on rice, through the mechanism of rice tickets.  These devices were designed to allow rice traders to generate money ahead of the harvest and to guarantee ongoing revenue. Even at this early stage, specifics were drawn into these agreements, such as a specific date, quantity and quality of rice to be traded.

It has also been demonstrated that early major global civilisations were engaged in international trade thanks to the forerunners to futures contracts.  The Romans were found to have traded for Lebanese lumber, Chinese silk and other Asian spices off the back of futures contracts, thereby introducing extremely valuable commodities to the Roman domestic market.

In more comparatively recent times, the Knights Templar established informal futures contracts for the delivery of goods from European merchants, acting as agents for the buying and selling of commodities across Europe.  While not written or formalised, these agreements were thought to work on trust and honour that delivery would be made at a future point in time, with the Knights Templar serving to manage disputes between trading merchants.

In modern times, futures have grown to embrace the technological revolution of trading and markets, and are today a hi-tech, constantly traded virtual instrument.

The story of futures trading is one that is littered with twists and turns, and the humble futures contract has come a long way from the days of stone tokens and etchings on the side of rocks.  While futures contracts have grown to become highly sophisticated trading instruments with an automatic reaction to underlying price and a wholly automated sale process, they nevertheless find their roots in the ingenuity of ancient civilisations.

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