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Brief Historical Note on the Development of Futures Trading (Forward Contracting) in the non-US Markets

Posted by Tom Craig in Futures Trading                          Words in this Post: 466

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Today’s Futures Markets are the result of principles and practices that are centuries old. Dating to the ancient Greek and Roman markets, formalized trading practices began with a fixed time and place for trading, a central marketplace, and a common currency system, as well as a method to store and deliver goods in the future.

The Forum in Rome was originally established as a trading center, while the Agora in Athens was a major commercial market for the Ancient World. Despite the fall of the Greek and Roman civilizations, centralized marketplaces continued. During the "Dark Ages," when centralized commerce was disrupted, products were bought and sold in scattered local marketplaces.

By the twelfth century, the scattered local market-places had evolved into large and quite complex "fairs." These medieval fairs grew near major cities and began to specialize not only in products but also in trade amongst nations. By the thirteenth century, transactions for later delivery had begun, with merchants, craftsmen, and politicians setting standard, of quality to be adhered to.

The major advances made in the medieval fair were the practices of self-regulation and arbitration, and the result they had in formalizing trading practices. In medieval England, a code known as the Law Merchant established standards of conduct acceptable to local authorities. In most cases the standards were minimal but they formed the backbone of common practices in the use of contracts, bills of sale, freight and warehouse receipts, letters of credit, transfer of deeds, and other bills of exchange. Violators of the standards were forbidden to trade with his fellow merchants, and often the punishment involved torture.
To resolve disputes between buyers and sellers, the English Merchant Association was granted the right to administer their own code of conduct by local and national authorities. By the fourteenth century, the English Merchant Association was recognized under common law as the arbitrator of trade disputes amongst members, allowing their assessments of penalties and awards to supersede those of local magistrates and courts.

In Japan by the 1700s, forward contracting was done on rice. Forward contracting is a cash transaction in which a buyer and seller agree upon price, quality, quantity, and a future delivery point and time for a specific commodity. Since nothing in these forward contracts was standardized, each term of the contract must be negotiated between the buyer and seller. Though enforceable by law, these forward contracts were only as good as the word of the parties involved.

The principles of self-regulation found in English Common Law followed settlers to the American colonies. Commodity markets existed in the United States as early as 1752 and traded domestic produce, textiles, hides, metals, and lumber. Most of the transactions in the markets were simple cash transactions for immediate delivery; they greatly increased the ease and scope of trading in all types of commodities.

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Tags: Forward Contracting, Futures Market, Historical Prospective, non-US Markets