The End of the Exchange

Are open-outcry markets over?

Source: Wikipedia

In Japan, around the year 1700, producers and consumers of rice decided they needed a place where they could exchange promises to buy or sell that year’s harvest. The market was in Osaka. At the time, samurai were paid in rice, and they needed to know what their pay was worth.

This became the world’s first futures exchange, and it facilitated the growth of Japan’s economy, as their currency shifted from rice to coins to paper money. Two centuries later, future exchanges were established in Chicago to facilitate the growth of American agriculture. If farmers and processors know the price of their crops, it helps them decide what to do next.

Over the past 50 years, futures exchanges have shifted from trading primarily agricultural products to mostly financial contracts. Growing up in Minneapolis, I heard reports from the Minneapolis Grain Exchange on WCCO Radio every morning. Now, news of eMini contracts on the value of global stocks and bonds are more widely reported. Financial contracts now make up the vast bulk of futures trading.

Source: Wikipedia

So I was a little concerned when I read that JP Morgan was leaving the floor of the London Metals Exchange. Was something wrong with the global bank? With gold contracts? With London? No, it has to do with trading. For years, the way to execute a futures contract would be for someone to make a trade in a futures pit or ring—a place where brokers, speculators, and local operators would meet. Each exchange has its own special character.

Now, more and more trading is being done electronically. Customers don’t need to call a dealer and have the broker use hand signals to tell the pit trader to buy or sell 1000 Novy bonds—hand signals because the shouting was so loud. Today, it’s more likely that those orders will originate on a computer screen and arrive via fiber optic cable. Most exchanges still have physical locations, but these are becoming dominated by electronic orders as well.

This is all in Dante, of course. In Chapters 16 and 17 of the Inferno Dante links money-lending to violence. He saw it as an affront to God that people would make money by trading contracts on money, rather than by sweat and hard work. In his time, the growth of Florentine banking facilitated the rise of Florence and other city-states. But he foresaw that the hubris that comes from financial success would lead to arrogance and an eventual fall.

Doré illustration from Dante’s Inferno. Source: Wikipedia

So I’m not surprised that more and more of our activity has become virtual and electronic. It makes sense for banks to focus where commerce is growing. We just have to be sure that all these future promises don’t overwhelm our real economy—that the tail doesn’t wag the dragon.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:22:39+00:00 September 8th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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