From Pits to Platforms – the Evolution of Futures Trading

Futures trading has come a long way since its humble beginnings—from traders shouting over each other, to a storm of hand signals within bustling pits. Today, the futures industry has vastly changed and transformed into sophisticated, global electronic platforms. The transition from chaotic trading floors to streamlined and easily accessible digital markets has happened relatively swiftly. We are going to explore the profound journey that the futures trading industry is on: through the origins of the space, significant milestones, industry advancements, and what’s projecting the industry into tomorrow.

Origins of Futures

The earliest traces of futures trading extend back to ancient Mesopotamia around 2000 BC. Although it is vastly different from the modern futures market, derivatives trading began here with contracts to manage risks associated with commodities sold by farmers. These contracts were written in cuneiform on clay tablets and included the following: the involved parties, goods being transferred, the delivery date, and the agreed-upon price. Sumerian temples served as storehouses and enforced regulations on the quality and quantity of the commodities to ensure that they were fair for all parties involved. 

The world’s first organized futures market dates back to 1730 in Dojima, Japan. Although a crude form of rice futures trading began in the late 17th century in Osaka, it was quickly prohibited by the city’s governor. In the late 1720s, the price of rice plummeted due in part to several good harvest years, significantly reducing samurai incomes. In 1724, Japan’s shogun, Tokugawa Yoshimune, lightened his stance on the ban of rice futures trading and lifted it completely by 1728. By 1730, merchants in Osaka had established the Dojima Exchange, which reached its peak in 1811. However, in 1939, its successor, the Osaka-Dojima Rice Exchange, was abolished under the controlled economy. 

These early advancements laid a strong foundation to support the complex futures market we know today—with countless commodities, financial instruments, and indices traded globally. The evolution that dates back to Mesopotamian contracts, to current sophisticated trading platforms highlights the continuous growth and effort that has been put towards futures.

Key Milestones

Futures trading has been molded by several milestones that have shaped the industry into what it is now. Every individual milestone is a unique advancement in the way that futures contracts are traded and regulated today.

1848 —  Establishment of the Chicago Board of Trade

The Chicago Board of Trade (CBOT) began to address the inefficiencies that plagued the grains market, such as inconsistent supply and demand, which caused price volatility. Having an established centralized market allowed for merchants and farmers to hedge against fluctuations in price more effectively. The CBOT created standardized contracts for commodities, such as grains, that noted the quality, quantity, and agreed-upon delivery time of the commodities.

Fun fact! The architect of the CBOT building placed a statue of Ceres, the goddess of agriculture, on top of the structure. At that time, it was the tallest building in Chicago. Believing no future building would surpass the CBOT in height, the architect gave the statue no face!

1874 — Creation of Chicago Produce Exchange

In the second half of the 19th century, the industry progressed further through the founding of the Chicago Produce Exchange, now known as the Chicago Mercantile Exchange (CME). The CME began with a focus on butter and egg commodities, but has since expanded its offerings to include a plethora of agricultural products, many of which are available to trade with EdgeClear. With a notable amount of success within the exchanges in the United States sparked a chain reaction for similar markets to be developed worldwide.

1982 — Stock Index Futures

Stock index futures were created in 1982 when the Kansas City Board of Trade released futures contracts that were on the Value Line Index. Only a few weeks later, the CME launched futures contracts on the S&P 500. By introducing this, investors were given a new opportunity to hedge against market risk and speculate on the future outlook of the market. 

1992 — Launch of the Globex Trading Platform

CME’s Globex electronic trading platform pioneered electronic futures trades. While it may have had a slow start, with many traders being weary to the new technology, it began to boom after the launch of the S&P 500 E-Mini futures in 1997. 

These four milestones have been monumental for the futures trading industry. If you are an active member of the space, you should strive to remain informed with the quick-paced advancements and shifts within the futures market’s dynamics.

Advancements in Futures

Algorithmic & High-Frequency Trading — This tech allows for traders to employ complex algorithms for executing their trades based on predefined criteria such as mathematical models or price movements. What makes these advancements so crucial is that they facilitate a rapid execution of a large volume of orders, often within microseconds. Some examples of algorithmic and high-frequency trading practices include: quantitative trading strategies, market making, and execution algorithms. 

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Machine Learning — Machine learning (ML) has revolutionized the futures industry by enabling computers with the ability to learn data and make predictions or decisions autonomously. These algorithms analyze a large pool of data sets and are able to identify patterns that may have been missed by traditional methods. ML is a huge asset within trading strategies, as it offers traders with enhanced forecasts within price movements based on historical data and other market changes in real-time. This empowers traders with the ability to adapt to quick-changing market conditions.

Contract Accessibility & Offering Expansion — Accessibility within futures has increased significantly over the years, making contracts available to a broader range of traders while also expanding available offerings. This has been led by tech advancements, regulatory shifts, and a rising demand for more flexible trading instruments. 

In the past, the industry was dominated by large institutional players because of high capital requirements and the complex systems. However, micro and mini contracts being brought into the space has expanded access to the markets. Smaller-sized contracts like micros and minis allow for individual traders to participate in the market with lower capital outlays, making it much easier to manage risk and diversify their portfolios. This expansion of contract accessibility has broadened the amount of market participants, improving market liquidity and depth.

Another notable development is the range of contract offerings. In current futures markets, traders can get contracts not only on traditional commodities like crude oil, silver, and agricultural products, but on indices, currencies, and cryptocurrencies. This diversification of contract types grants traders exposure to many markets and allows them to hedge against risk more effectively. 

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Risk Management — We have witnessed significant advancements within risk management tools. These innovations aim to improve both the safety and stability of trading accounts, ensuring that traders can manage their risk exposure and protect their accounts. Below are three risk management tools that traders can use today. 

• Auto Liquidation Tools — These tools close out positions when its set risk thresholds are met, protecting traders from significant losses. This ensures that a trader’s account will stay within their margin requirements, increasing safety and stability.
  
• Real-Time Risk Analytics — The analytics gained through this tool gives traders real-time data on their risk exposure, empowering them to make quick informed decisions.
  
• Position Limits — Position limits are thresholds that a trader must not exceed to prevent overexposure within a single market or asset. Having these limits in place ensure that traders will maintain a diversified portfolio while reducing the risk of significant losses.

Advanced Charting Tools — The futures market has made huge advancements within charting technology, enhancing how traders analyze market data and providing more well-informed decision-making. Before more advanced charting tools emerged within the space, traders would have to spend considerable time hand-drawing charts. Not only were these hand-drawn charts labor-intensive, but also more susceptible to having errors. Today, traders have access to advanced charting tools that make the charting process significantly more efficient and precise compared to manual techniques used in the past. 

Among the wide array of charting tools available, there are three that stand out for their powerful offerings and market application: market profile, volume profile, and order flow. Each of these three tools provides a unique perspective on market data, empowering traders to gain a greater understanding of market behavior, how to identify key trading opportunities, and executing strategies with precision. 

• Market Profile – This charting technique takes price and time data and places it into a distribution curve so you can see what price levels are the most traded. Market profile is extremely beneficial to traders, as they get a visual representation of the market’s structure, allowing traders to anticipate where the market may be headed based on historical patterns. Traders can use market profiles to identify the levels of support and resistance, establish a stronger understanding of market sentiment, and recognize potential trading opportunities.

• Volume Profile – Volume profile is built upon the concept of market profile, but it takes a focus on the amount of trading activity at each price level over a period of time. The tool shows where the highest amount of buying and selling took place, highlighting areas of low and high volume. By utilizing volume profile within their market analysis, traders can identify significant price levels where market participants are likely to place their trades, allowing them to make educated decisions from these market dynamics.
  
• Order flow – Many modern traders consider order flow analysis to be a paramount tool for charting. Order flow examines the flow of buy and sell orders in real-time. By analyzing this data, traders can see the depth of the market, if there’s any imbalance between supply and demand, and how aggressive buyers and sellers are. 

Overall, these advanced charting tools provide traders with a variety of  sophisticated methods to analyze the markets. By leveraging these tools properly, traders can gain a strong trading edge and even increase their long-term profitability.

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A Look Ahead

We have certainly come a long way from futures trading’s ancient origins to the complex digital age the industry is in today. The industry continues to rapidly evolve and change alongside technological advancements. We have witnessed an immense amount of change within the past two decades and it is clear that the space is not slowing down. I expect that the futures industry will continue to advance and provide stronger solutions that will empower traders. By embracing these advancements and continuing to adapt alongside the industry, traders can leverage themselves to chart a course towards a sustainable futures trading journey with long-term profits. 

Disclaimer: Derivatives trading involves a substantial risk of loss and is not suitable for all investors.