History of Commodities Trading

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By Carmelo J. Montalbano
eHow Contributing Writer

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History of Commodities Trading

Commodities trading, or the forward purchase of agricultural and basic material products based on a current price, reflects the economic need for price certainty through the year or agricultural cycle. The history of commodities trading goes back to the Sumerians, who used jugs to purchase future deliveries of agricultural products. Today, the many futures markets help maintain efficient cost structures in many agricultural, basic material and financial products.

Ancient Roots and Beginnings

Early Russian Commodities Trading House
Commodities trading--the exchanging of basic foodstuffs, minerals and cotton--dates back to prehistoric times. The Sumerians consolidated prepayments for food into tubs that they would later exchange for food once it was harvested.
These payment systems were further standardized when the spice routes opened in the late 1580s. Spain and Portugal, through the Crown, reserved specific quantities of spices for future delivery and according to contracted specification. Prices were fixed in advance of the trip.

Modern American Commodities House Exchanges

The Chicago Board of Trade (CBOE) is the oldest established commodities house, founded in 1846 by Chicago merchants. The driving force was the need for manufacturers to obtain supplies in the future against developing orders. Meanwhile, farmers did not want to rely on prices set only during the period of harvest, when maximum supply would be on the market. The first contracts were called "to arrive" contracts for flour and hay, and later came to be known as "forward" contracts. Other commodities were added, including corn, in 1850.

National Exchanges Meet Increased Demand

Over the next several decades, the industrialization of the United States and Europe created demand for many other products that could be purchased for future delivery. The Chicago Mercantile Exchange created the futures markets to trade farm produce and byproducts such as soy oil. Later, the New York Mercantile Exchange opened to trade oil and energy products, and was the largest trading facility for physical commodities before its merger with the Chicago Mercantile Exchange.

The Need for Commodity Regulation

Commodity regulation came into effect in the 1920s by both state and federal governments. The Commodity Futures Trading Commission codified the regulations with its creation in the mid 1970s. The commission's purpose is to protect markets and the public from fraud and manipulation with respect to futures markets and their derivative products such as single-stock futures and options on futures.

The Growth of Financial Futures

Trading in financial futures began in the 1970s. Trading in the Standard and Poor's 500, dominated by institutional traders, extended into other synthetic products for other major markets. Today, futures trading exists for all major indices including the Dow Jones, NASDAQ, Russell 1000, Russell 2000 and Russell 3000. At the same time, trading developed in such interest rate futures in the 2-, 5-, 10- and 30-year securities.

Recent History of the Futures Market

An important futures market developed in mortgage-backed securities. The off-market trading of mortgage-backed securities contributed heavily to the recession that began in 2007.
Recent activity to better control these mortgage-backed securities market is designed to centralize, through an exchange, the clearing and transparency of futures trading currently traded off-exchange. This is important so that spillover effects similar to the mortgage-backed trading debacle do not affect the larger economy.