Picture yourself in 1900. No radio. No television. No cell phone. No Internet. The only way to trade commodities was in person. News about what happened in the markets came out once a day, in a newspaper.
One hundred years ago, grain futures markets already had been established in major U.S. trading centers for more than 50 years. Typically begun as a place where cash transactions occurred, the markets had developed the basic scheme of futures trading that carries on to today’s market: In exchange for a small “good faith” deposit, two parties agree to exchange a specified product for a specified price at some point in the future. Similar markets were active in produce, grocery (softs), dairy and meat commodities.
It’s almost hard to believe the progress that has occurred since then. As the futures industry embarks on the 21st century, the concept of risk management has spread around the world and encompasses not just agricultural markets, but also the biggest commodity of all—money.
Although the markets first benefited and then struggled due to the events surrounding two world wars, the growing globalization of the world economy in the second half of the century played directly into the hands of those who understood the new risks that businesses, governments and individuals faced. In this light, it is only natural that the futures industry developed successful currency, interest rate and stock index product lines, sectors that would come to dominate the futures world that had been focused on agriculture until the 1970s. Indeed, even though U.S. Treasury bond futures did not open until 1977 (options in 1982), the contract was the most-traded of the century, with volume totaling more than 1.5 billion contracts.
What’s coming up for the years that begin with “2?” Only time will tell. But as traders stand on the doorstep of the new year/decade/century and millennium, with cell phone, PalmPilot and laptop at the ready, you can be assured they are reacting to events around the world almost as if they were there in person.
1900s - Staking Claims
Futures exchanges were still feeling their oats as the 20th century began, sorting out who they were, what they needed to succeed and staking claims that would pay dividends for the next 100 years.
In February 1900, a lawsuit pitted bucketshops versus the Chicago Board of Trade, and eventually was settled by the U.S. Supreme Court five years later. A prominent bucketshop of the day, Christie Grain and Stock Company, received an injunction in February 1900 that prevented the CBOT from withholding grain futures price quotes to the company on the grounds that they were used for illegal purposes. In arguing the CBOT’s case before the Supreme Court, attorney Henry S. Robbins was perhaps one of the first to distinguish between the purposes of hedging and speculation in futures markets versus gambling. Not only did the CBOT gain legal control over the use of its quotes, but it also drew the line in the sand for those who would charge its activities were nothing more than gambling.
The bankruptcy of CBOT member George Phillips in 1902 touched more than 40 percent of exchange members and led to discussions about formation of a centralized clearinghouse in 1903. However, the ongoing lawsuit over bucketshops prevented the exchange from going forward with the plan.
A transportation committee of the New York Mercantile Exchange, founded as the Butter and Cheese Exchange of New York in 1872, was established in 1907 to help improve conditions related to freight traffic rates, rules and regulations. John C. De la Vergne, an exchange member and one of the pioneers of refrigeration, headed the committee that focused on securing newly constructed refrigerated cars for moving butter, eggs and poultry across the country.
Midway through the decade, another NYMEX committee worked with the New York Police Department to halt the common problem of burglaries in the area where the exchange was located at 6 Harrison Street, its home until it moved to the World Trade Center in 1977.
1910s - War Spurs Prices
With World War I in full swing, corn prices in 1916 hit $1.05 per bushel, their highest level since before the Civil War. A year later, wheat reached an all-time high of $3.25 per bushel. After the United States entered the war and basic commodity prices surged, the government stepped in and suspended futures trading in wheat, sugar, cottonseed and cottonseed oil futures. A set of price controls were established on all commodities that were considered military necessities. After the armistice was signed in 1918, price controls around the world were lifted. Ultimately, the rally that extended into 1920 was followed by a sharp retreat into 1921 and encouraged ill feelings about grain speculators.
World War I forced closure of traditional raw sugar markets in London and Hamburg, Germany. As a result, the Coffee Exchange of the City of New York listed sugar futures in 1914. Two years later, it changed its name to the New York Coffee and Sugar Exchange. In 1916, NYMEX introduced blackboard trading to the exchange floor.
In 1919, the Butter and Egg Board in Chicago, which had its roots in a produce-trading group begun in the 1870s, changed its name to the Chicago Mercantile Exchange and simultaneously established the CME Clearing House. Opening-day volume on December 1 was three lots of eggs, traded in 45 minutes. The 100 memberships typically traded for about $100 each. The exchange operated at Wells and Lake Streets from 1921 through 1928.
1920s - Government Regulation of Futures Begins
Formation of the Grain Futures Administration in 1922, designed to oversee grain futures trading and eliminate price manipulation and other trade abuses, ushered in federal government regulation of futures trading in the United States. Although the CBOT challenged the constitutionality of the Grain Futures Act, the U.S. Supreme Court upheld its legal status in 1923. When the new agency began discussing the possibility of imposing daily price limits on futures trading, CBOT President Frank L. Carey called it a deplorable and unhealthy restriction of supply/demand freedom.
In 1925, the CBOT gained authority to declare an emergency situation and establish its own daily price limits. However, trouble was already brewing. Legendary grain speculator Arthur Cutten had taken delivery of five million bushels of wheat starting in late 1924, causing wheat prices to reach more than $2 per bushel. Indeed, trading volume at the CBOT in 1925 hit 5.4 million contracts, a record that stood until 1963.
At about the same time, the government’s final reports concerning its investigation of the grain trade (which had begun in 1916) hit the press. In the end, the CBOT took to heart Secretary of Agriculture William Jardine’s suggested reforms, including regular reporting of large trader positions, a business conduct committee and formation of a centralized clearinghouse. Seven years after the CME had created a clearinghouse in 1919 and two years after a similar institution had been established at NYMEX in 1924, the Board of Trade Clearing Corp. was formed in 1926 to guarantee trades at the CBOT.
Although futures call sessions had been a regular feature since 1903 at NYMEX (primarily a cash market), the exchange did not formulate rules for butter and egg futures trading until 1921. Two years later, exchange President Julius D. Mahr reported that futures trading has resulted in a “considerable increase in dealings.” These initial rules encouraged physical delivery to fulfill the contract at maturity rather than offsetting the contract before its expiration, and 99 percent of contracts were closed out by delivery.
In 1925, The New York Cocoa Exchange was formed. That same year, Western Union tickers replaced the slower Morse service at the CBOT.
Exchanges were on the move in the late 1920s. The Kansas City Board of Trade, founded in 1856, moved two blocks to larger quarters at 10th and Wyandotte in Kansas City. The CME moved to a new facility at Washington and Franklin Streets on April 25, 1928 that boasted a two-story, 5,000-square-foot trading floor. Blackboards with news and the latest bids and offers surrounded the three trading pits. The exchange was at this location for 45 years, the longest occupancy of its history.
In 1929, trading at the CBOT moved to temporary quarters on Clark Street, south of Van Buren Street, to accommodate construction of its Art Deco home, which opened in 1930 and was designated an historic landmark in 1967. Seat prices at the CBOT peaked in 1929 at $62,500, a sum that would not be surpassed until 1973.
1930s - The Great Depression Rules
The years 1930-1932 have the ominous distinction of being among the three worst years for the Dow Jones Industrial Average, which had dropped a precipitous 23 percent in just two days—October 28 and 29, 1929. The annual declines in the stock market during the first third of the decade ranged from 23 percent in 1932 to a record 53 percent in 1931, which followed the 34 percent drop in 1930.
One of the lingering reminders of the good times in the 1920s was the opening of the landmark CBOT building at the foot of LaSalle Street in 1930, anchoring the South Loop of Chicago. The 45-story building was Chicago’s tallest until 1955. The 19,000-square-foot trading floor was the world’s largest.
Despite the bleak economy, the butter and egg business was thriving in both New York and Chicago, with cash dealers at NYMEX, who were watching the Chicago futures ticker via the ticker installed in 1931, wiring orders to their Midwestern brokers. During the 1930s, NYMEX became associated with the dressed poultry market and conducted an active cash market trade in that commodity.
In 1933, the CBOT was closed from March 6 through 13 for the bank holiday declared by President Franklin Roosevelt, who also declared a prohibition on ownership of gold by U.S. citizens. On July 5, 1933 the Commodity Exchange (COMEX) opened for trading in New York with silver and copper contracts, but lusted to list gold as well. That dream did not come true until December 31, 1974.
In 1936, two years after the Securities and Exchange Commission had been formed to bring regulation to the stock market, the Commodity Exchange Act replaced the Grain Futures Act and created the Commodity Exchange Authority as the federal regulatory agency charged with overseeing futures markets. The CEA also banned options trading in certain agricultural products, an order that was not lifted for nearly 50 years. One of the first major actions pursued under the new regulations was the charge that giant grain marketer Cargill, Inc. had manipulated the corn market and attempted a corner. Although the company was allowed to continue trading futures, its president was expelled from membership on any grain exchange and suspended from trading until 1942.
1940s - World War II Sets Price Controls
After Germany invaded Paris in 1940, wheat open interest dropped 37 million bushels in just six days as prices plummeted on the idea that an Allied surrender might bring the war to a quick conclusion. According to data collected by the Commodity Exchange Authority, no corn trading occurred on U.S. markets from July 1943 through July 1944, with just one million bushels (200 contracts) exchanging hands in August 1944. The soybean futures market was closed from March 1943 through July 1947.
Just a week before Japan attacked the United States at Pearl Harbor in 1941, NYMEX introduced potato futures, a product that would become its most important commodity for 30 years. However, the war slowed exchange activity to the point that the potato contract had just 80 contracts traded in 1945. The next year, after the war was over, volume soared to nearly 16,000 contracts. Volume hit a peak of more than 4,000 contracts in March 1948, a level that was not exceeded for more than four years. Bolstered by the potato contract’s success, NYMEX introduced onion futures in 1946.
Trading at the CBOT did not even reach one million contracts a year in both 1942 and 1943, and grain trading hit a record low on June 17, 1946. In 1946, corn trading overtook the wheat market as the CBOT’s volume leader for the first time since at least 1921, trading 132,289 contracts that year versus the 55,591 that traded in wheat. However, corn did not maintain that dominance on a regular basis until 1965.
Advances made due to the war diminished the need for an egg futures contract. According to NYMEX history, the ability to roof chicken coops with aluminum helped maintain even temperatures inside the buildings year-round. As a result, chickens began laying eggs all 12 months of the year rather than just March, April and May, and the seasonal need to hedge eggs vanished.
1950s - Exchanges Mature as Businesses
In 1953, the CME created the post of exchange president to handle day-to-day operations. Everette B. Harris took the job, resigning from his post as secretary at the CBOT. Three years later, in 1956, the CBOT hired its first paid, non-member president, Robert C. Liebenow. Previously, an exchange member had been elected to the post; now, the elected member’s title becomes chairman. In 1960, John W. Clagett, Jr. was appointed the first staff-member president of NYMEX.
In 1956, NYMEX introduced futures trading on platinum, the only precious metal whose price was not controlled by the government.
Across the big pond, the London Commodity Exchange was formed in 1954. Traders grouped themselves into terminal market associations for cocoa, coffee and raw sugar. Twenty years later, when the exchange was reconstituted as a non-profit company, the number of commodities had expanded to also include petroleum, soybean meal, vegetable oil and rubber.
In 1955, the Futures Industry Association was formed, an outgrowth of the Association of Commodity Exchange Firms of New York.
Non-Storable Commodities Advance Product Spectrum
One of the first events of the 1960s in the futures world was the formation of the Sydney Greasy Wool Futures Exchange, later to become known as simply the Sydney Futures Exchange. The Australian exchange opened trading in May 1960 following nearly 10 years of persistence from Clive Hall, a lifelong wool trader who had tired of doing business on the London market given its distance and inconvenient time zone. The ever-thinking Hall reportedly suggested a futures contract on a share-price index (stock index) to colleagues in 1966. Just such a contract was introduced in 1983, less than a year after the first stock index contract debuted in the United States. The All Ordinaries Share Price Index listed at Sydney was the first stock index futures contract outside the United States.
In Chicago, members of the CBOT had the idea to trade a cash-settled futures con099yt on the Dow Jones Industrial Average in 1968. However, the idea was scuttled because the exchange’s counsel, prominent securities attorney Milton H. Cohen of Schiff, Hardin, Waite, Dorschel & Britton, thought the idea would enter the arena of state and SEC gambling laws. Instead, the CBOT massaged the idea of futures on a stock index to the idea of opening an exchange to trade options on listed securities. The Chicago Board Options Exchange opened just five years later, on April 26, 1973.
The resounding success of the frozen pork belly contract, introduced in 1961 at the CME, encouraged the exchange to develop more contracts based on meats. The CME caught the world’s attention when the exchange brought a live steer onto the trading floor for opening-day ceremonies in live cattle futures in 1964. Live hogs followed in 1966, with feeder cattle in 1971. The meat complex introduced in the 1960s at the CME remains viable as the century comes to a close, proving that there was a market for non-storable, perishable commodities.
New York traders tried their hand at a non-traditional agricultural product in 1966 when trading on frozen concentrated orange juice began at the New York Cotton Exchange. The CBOT introduced its first non-grain product—silver—in 1969; gold did not follow until 1979. NYMEX, which had ventured into the metals arena in the 1950s, listed low-cap stocks in 1962 when it opened the National Stock Exchange, which was shuttered in 1974. It added palladium to its mix in 1968.
While the product boundaries were expanding in the futures world, the financial stability of the entire world was starting to crack. After holding the British pound steady at $2.80 since 1949, the British government devalued its currency to $2.40 in 1967, one of the first signs that the fixed currency parameters and the fixed price of gold established by the Bretton Woods agreement were becoming unworkable. In anticipation of the pound’s devaluation, University of Chicago free-market economist Milton Friedman (who had won the Nobel prize for economics a year earlier) attempted to take a short position of $300,000 in the currency, but was flatly refused by bank dealing desks. News of this experience made the papers and ultimately brought Leo Melamed, the Young Turk chairman of the CME, to Friedman’s doorstep asking for an analysis and support of a futures market in currencies.
1970s - Financial Futures Debut
In the early 1970s, change was in the air. The United States was awash in the Vietnam War and all the protests that went along with it. The world economy was becoming restless. In 1971, the imposed steadiness of the Bretton Woods agreement fell apart as the United States announced in August that it would no longer sell gold at $35 per ounce to any central bank that wanted it at that price. By year’s end, the fixed-rate currency scheme that had prevailed since the end of WWII was reworked, with the previous fluctuation band more than doubled.
Melamed and his CME cohorts were ready to pounce on the opportunity to introduce futures markets on the newly freed currency markets, and amazingly opened for trading in just a few months. Fittingly, Friedman rang the opening-day bell on May 16, 1972 to introduce futures trading in British pound, Canadian dollar, Deutsche mark, Dutch guilder, Japanese yen, Mexican peso and Swiss franc contracts.
The CME moved to the “black box” above the air rights to Chicago’s Union Station in 1972, nearly tripling its trading floor space. Six years later, the trading floor was expanded to 23,000 square feet from its original 14,000.
As in the 1920s, dissatisfaction with the policing of futures markets led to a new government agency to patrol the industry. Sentiment against the CEA had been building since the DeAngelis salad oil swindle of 1966, after which the CEA mostly ignored recommended reforms. In 1973, corn and soybean prices rocketed to all-time highs due to production problems in the United States and the decimation of the Peruvian anchovy crop. (The high in soybeans of nearly $13 per bushel has not been seriously challenged since 1973, and the $4 high in corn set that year was not surpassed until 1996.) Meanwhile, the wheat market soared as the Soviet Union came to the United States to buy grain, and Senate hearings ensued in the summer of 1973, coinciding with those of the Watergate investigation. As a result, the Commodity Futures Trading Commission was created by Congress in 1974 and opened its doors in April 1975 with William Bagley, a Republican legislator from California, at the helm.
Five exchanges listed gold futures contracts on the eve of the American citizen’s right to once again own gold on January 1, 1975—CBOT, CME, COMEX, MidAm and NYMEX. In Singapore a year earlier, the groundwork for what would become the Gold Exchange of Singapore (to open in November 1978) was begun by rubber traders there. The GES changed its name to the Singapore International Monetary Exchange in 1983.
The CBOT launched the world’s first interest rate futures contract, Government National Mortgage Association (GNMA), in 1975. A year after the CBOT tested the waters, the CME listed a U.S. Treasury-bill futures contract. The CBOT volleyed with the U.S. T-bond contract in 1977. Federal Reserve Chairman Paul Volcker provided the boost that the interest rate futures markets needed with his October 1979 announcement that the Fed would focus on the money supply rather than interest rates in fighting inflation. With that, the market was free to establish interest rates, and with rates in double-digits, interest rate risks were on the front burner and so was interest in interest rate futures.
The New York Coffee and Sugar Exchange merged with the New York Cocoa Exchange, founded in 1925, to form the Coffee, Sugar & Cocoa Exchange in 1979. That same year, the New York Stock Exchange founded the New York Futures Exchange, which it sold to the New York Cotton Exchange in 1993.
In New York, NYMEX hit a string of trouble in the 1970s that nearly closed the exchange. It began with the default of nearly 50 million pounds of potatoes on the May 1976 contract, which alienated producers, members and regulators. Potato volume dropped 45 percent versus 1975 and membership values plummeted to $5,000 from $47,000. Despite reforms to the contract and exchange procedures, another crisis struck three years later when stocks delivered against the March 1979 contract did not pass inspection; the exchange acted quickly to suspend trading in the March contract and liquidated the April and May offerings. (NYMEX delisted this potato contract in 1987, and introduced an improved version in 1996.) NYMEX would have merged with COMEX in 1979 but for a change of heart on the part of the COMEX board of directors.
In between the potato disasters, a new, young NYMEX chairman named Michel Marks focused on the energy markets as a way to diversify the exchange’s product line. NYMEX already had tested the waters in 1974 with a fuel oil contract calling for Rotterdam delivery. By 1978, the risk of uncertain crude oil prices was affecting every industrialized nation, and NYMEX introduced the No. 2 heating oil futures contract, the first in its very successful line of energy products.
The serious move toward stock index futures, a feature of the 1980s, began in 1977 when the KCBT applied to the CFTC for a stock index futures contract based on 30 industrial stocks. Two years later, the exchange submitted an amended contract based on the Value Line.
As the 1970s were winding down, inflation was heating up and taking precious metals prices with it. Crude oil prices, still officially set by members of the Organization of Petroleum Exporting Countries, exceeded $40 per barrel in late 1979. Adding a “safe haven” element to the gold and silver markets was Russia’s invasion of Afghanistan in December. Meanwhile, the Hunt brothers of Texas had been buying silver contracts.
Although the headlines seemed bad, the inflation-wracked 1970s had been good to the futures industry. Volume had risen more than five-fold over the decade, reaching 76 million contracts in the United States by 1979.
1970s - The World Embraces Futures
The calendar had barely turned to a new decade when President Jimmy Carter declared an embargo on grain shipments to the Soviet Union in retaliation for the country’s invasion of Afghanistan in December. As a result, U.S. grain futures markets were closed on January 7 and 8, 1980, following a CFTC order to suspend trading. In gold and silver pits across the country, however, the action in January was as hot as the weather was cold. Silver prices peaked at $50.35 per ounce while COMEX gold topped out at a record $875 per ounce.
Soon after the U.S. Federal Reserve opened the floodgates for discovery of interest rate values in October 1979, the British government lifted exchange controls that opened up the possibility for financial futures in London. Within a month, the move was on to create such an exchange, and the first two years of the 1980s were filled with the excitement of developing a world-class financial futures exchange, using Chicago’s open outcry markets as the example. John Barkshire of Mercantile House led the way and served as chairman of the London International Financial Futures Exchange from 1981 through 1985. With the best wishes of Prime Minister Margaret Thatcher received the day before, LIFFE opened for trading at the Royal Exchange on September 30, 1982. Futures on the British pound and Eurodollars were available on opening day, with five more contracts joining the mix by December 1.
In 1984, the first steps toward the globalization of futures occurred when the CME linked with the Singapore International Monetary Exchange in a mutual offset deal. Although the exchanges and their clearinghouses remained separate entities, the exchanges agreed that trades in identical futures contracts could be made at one exchange and offset at the other.
At the CBOT, the initial solution to trading beyond regular U.S. market hours was the start of the night trading session in U.S. T-bonds in 1987. It also explored linking with LIFFE via a mutual offset system. Once the deal fell apart, however, LIFFE began developing its own after-hours electronic trading platform in 1988.
The future of futures was revealed, however, when the CME and Reuters announced in September 1987 that they would jointly develop an electronic trading platform called GLOBEX. It was nearly five years before that announcement became reality, but, to traders, the fight was on between open outcry markets and the dreaded “black box.”
FINEX, the financial division of the New York Cotton Exchange, was founded in 1985, and within 10 years had established a trading floor in Dublin to accommodate the European demand for its financial products.
Certainly, stock index futures were the dominant innovation of the 1980s, but that segment of the industry would not have blossomed without a very important development in late 1981—cash settlement of contracts rather than physical delivery. The Eurodollar contract at the CME was the first in the United States to call for its final settlement in cash rather than the delivery of the underlying instrument. (The Sydney Futures Exchange beat the CME to the punch on a worldwide basis by listing a cash-settled U.S. dollar contract in 1980.)
The stock index futures whirl began on February 24, 1982 when the KCBT opened trading in the Value Line stock index, the first such product launched in the world. The CME was not far behind with the S&P 500, which opened on April 21. The New York Futures Exchange listed futures on the NYSE Composite index on May 6. All three products remain active as the century comes to a close.
The KCBT also was the first to list a “mini” version of its broad index, beating the other two exchanges by more than a decade. The Mini Value Line stock index futures contract began trading in 1983. The E-mini S&P 500 and the Small NYSE Composite did not open until 1997 and 1998, respectively.
The stock market crash of October 19, 1987 was a watershed for the futures industry. Initially, the futures markets took a lot of heat for the stock market’s record one-day percentage loss of more than 22 percent. But, significantly, the President’s Working Group on Financial Markets that investigated the crash determined that the stock market and stock derivative products had become inextricably linked.
In 1982, the CBOT opened a new annex office building and 32,000-square-foot trading floor for agricultural products, leaving financial instruments to take over the space overlooking LaSalle Street in which the grains had traded since 1930. A year later, in 1983, the CME moved its operations and trading floor to the new 40-story CME Center—two office towers connected at their lower levels by two stacked trading floors covering 10 stories and totaling 70,000 square feet.
Options on futures got the government’s go-ahead in the 1980s, with options on T-bond and sugar futures the first to debut, in 1982. Options on agricultural futures, which had been banned since the 1930s, opened in 1984.
The number of futures products exploded in the 1980s, and the 89 new contracts introduced in the United States that decade was just two shy of the total number of products launched in the previous 130 years. While U.S. futures and options volume had more than tripled during the decade to 323 million contracts traded in 1989, volume on international exchanges grew nearly 10-fold, ending the 1980s with an annual volume of 184 million.
1980s - Technology Pressures Force Change
The pressure for developing worldwide, 24-hour access to an exchange’s products heightened in the 1990s as technology made the job increasingly feasible. Following the pattern established by the CME and SIMEX in 1984, the CBOT and LIFFE once again attempted an open outcry link. Although talks began in 1993 and the papers were signed in 1995, the link was not open until 1997, and in that time, the idea of linking open outcry trade had fallen by the wayside in favor of links between electronic trading platforms. The success of Eurex, the German futures exchange born in 1990 as the Deutsche Terminborse, or DTB, had changed everything.
Even before the DTB opened in 1990, LIFFE had been wheeling and dealing to list the German government bond, or bund, futures contract. By the time DTB started trading, the bund had been a fixture at LIFFE for more than two years. By 1994, the bund was LIFFE’s dominant contract, accounting for 30 percent of all volume. LIFFE’s hold on the bund began to falter in 1997, and by 1998, trading in the bund had moved completely to the DTB’s electronic platform. Many in the industry heard the first chimes of the death knell of open outcry.
Just a few months before, the Sydney Futures Exchange shocked the industry when it announced in fall 1997 that it intended to completely shut down its open outcry trading and move to an electronic trading platform, a feat it accomplished just two years later. LIFFE made the same decision and went electronic in the fall of 1999.
Somewhat ironically, the same year that CBOT members approved construction of the new financial trading floor, 1994, the exchange also developed and launched Project A, its after-hours, electronic trading system, set up as a separate, for-profit company owned by exchange members. Members received their first distribution from Project A, a check for $1,000 each, in 1997.
The financial markets at the CBOT gained a new, technologically advanced trading floor in February 1997. The trading space (dubbed the “Arboretum” by some in deference to its champion, CBOT Chairman Patrick H. Arbor) was the world’s largest, at 60,000 square feet. Some industry pundits prognosticated that it would be the last futures trading floor built in the world.
Yet, there was no denying that financial futures at the CBOT were important, no matter where they traded. In April 1992, when downtown Chicago’s underground tunnel system flooded, the Chicago exchanges were forced to close. As proof of the futures market’s importance to end-users, global trading in U.S. Treasury securities slowed to a crawl for the short time the exchanges were dark. The CBOT was affected the most, closing on April 13 and 14 and reopening on April 15 for shortened sessions that day and the next. Regular trading hours resumed on April 20.
Technology pressures did bring the CBOT and CME to the table to discuss possible synergies under the umbrella of the Joint Strategic Initiatives Committee, formed in 1996. A common clearinghouse between the two exchanges was one of the major issues pursued under JSIC, but ultimately failed in 1998. Later that year, the BOTCC and the CME Clearing House did agree to common banking and cross-margining. Although there were hints that merger talks between the two trading giants might be feasible, the long-held competitive nature of their memberships could not be overcome.
In London, the London Commodity Exchange merged with LIFFE in 1996, four years after LIFFE had taken on the London Traded Options Market. The International Petroleum Exchange remained independent, but flexible to the idea of merger.
The pressures that exchanges felt were not confined to the futures industry. Indeed, the industry was getting heat from the over-the-counter market and even its own members, who were developing trading platforms. To stake a claim in the melting pot of financial instruments, the CBOT formed Chicago Board Brokerage in 1998, an electronic system for trading cash government securities and other OTC products; it also created a securities clearinghouse to clear those trades. Coming from the other side was the brash Cantor Financial Futures Exchange, devised by the cash-security trading house Cantor Fitzgerald. CFFE took direct aim at the CBOT, listing T-bonds and T-notes on its electronic platform in 1998. Ultimately, neither exchange was able to successfully penetrate the other’s territory – at least though 1999.
As the decade and century came to a close, exchanges around the world were seriously investigating demutualisation, or the switch form a member-owned, not-for-profit entity to one in which shareholder profits would allow exchanges to act quickly in an ever-more-competitive environment. Over the years, the committee system of developing and approving new ideas had become cumbersome.
Despite the emotional turmoil surrounding the very essence of how futures business is accomplished, trading volumes continued to rack up records. T-bond futures traded more than one million contracts to a single day for the first time in 1997, a level equal to about one month of trading in 1981. Worldwide futures and options volume topped one billion contracts for the first time in 1993, and five years later that level was achieved both in the United States and internationally.
Susan Abbott Gidel is president of GCA Communications Group, Inc. in Chicago.