Are open exchanges over?
Public Domain. Source: Wikipedia
In Japan, around 1700, producers and consumers of rice decided they needed a place where they could exchange promises to buy or sell that year’s harvest. At the time, samurai were paid in rice, and they needed to know how much they were really being paid.
This became the world’s first futures exchange, and it helped Japan’s economy grow, as their currency shifted from rice to coins to paper money. Chicago established futures exchanges in 1864 to facilitate the growth of American agriculture. When farmers and processors know the price of their crops, it helps them make better decisions. Prices are powerful.
Over the last 50 years, futures exchanges have shifted from trading mainly crops to mostly financial contracts. Growing up in Minneapolis, I listened to reports from the Minneapolis Grain Exchange on WCCO radio every morning. Today, people often hear about Dow futures before they hear the weather report.
Illustration: Anthony Wikrent. Source: Wikipedia
So why is everyone leaving the trading floor? Is something wrong with the futures exchanges, or their contracts? No, it has to do with trading. For years, to get a futures trade done you had to send your order to a pit – the place where Eddie Murphy and Dan Aykroyd made their killing in Trading Places.
Now, most trading is done electronically. We don’t need to call a broker to buy or sell contracts. People send their trades in online, and an algorithm matches them up. The TV shots from the stock exchange with messengers scurrying around are anachronistic. Most equity trading happens inside a set of computer programs.
This has all happened before. In Dante’s Inferno money-lending is violent sin. It was an affront to God to make money by shuffling paper, rather than by sweat and hard work. In Dante’s time, the growth of banking led to the rise of the Medici’s and helped cause his own exile.
Woodcut from Dante’s Inferno. Public Domain. Source: Wikipedia
It’s not surprising that our financial activity is becoming more and more virtual. It makes sense to focus where commerce is growing. We just have to be sure that all these future promises don’t overwhelm our real economy, and that the tail doesn’t wag our dragon.
Douglas R. Tengdin, CFA