History of Commodity Trading

Whether you trade commodities or not, you directly or indirectly interact with the commodity market every day via the foods and other resources you use. It will be interesting to know how the commodity market came about.

Trading commodities is an ancient profession with a longer history than the trading of stocks and bonds. The rise of many empires can be directly linked to their ability to create complex trading systems and facilitate the exchange of commodities.

THE PREMODERN HISTORY: 4500 BC

It is believed that commodity trading began in Sumer (modern-day Iraq) between 4500 BC and 4000 BC. During this period, the Sumerians would denote the number of goods to be delivered using clay tokens that were enclosed in clay vessels and writing tablets. This practice is similar to the futures contracts of the present day as these contracts used to be settled after the seller had delivered their goods on the date that was imprinted on the token.

Another instance of early commodity’s trading can be traced to the late 1700s B.C. During this time, the laws governing trade and commerce are determined by the ruler’s code. King Hammurabi, a Babylonian king, engraved the laws on stone slabs. Interestingly, King Hammurabi’s code covered every significant aspect of trade law at that time, making it the background for Babylonian and Assyrian laws.

The Asian commodity market of the 18th century

One of the most famous instances of early futures trading was in Japan in the 17th century, and the first-ever commodity to be traded as a futures contract was rice. It happened during the Edo period (1603–1867) in Japan when rice merchants hoarded rice and stored it in warehouses and residences for future consumption. Subsequently, these merchants would sell the accumulated receipts as a promise to exchange the rice at a future date. These rice receipts/tickets would later form the foundation of the current model of U.S. futures trading.

From then there has been evolution in the commodities market

The evolution of commodity market in the US: 1848 to date

1. The establishment of the Chicago Board of Trade (CBOT) in 1848
2. The launch of the Kansas City Board of Trade in 1856
3. The creation of the Minneapolis Grain Exchange (MGEX) in 1881
4. The establishment of COMEX in 1933
5. The creation of Commodity Price Indices in 1933
6. The Commodity Exchange Act and addition of Live Stocks
7. The emergence of electronic commodities trading in 1999

The introduction of the Financial Information exchange (FIX) protocol in 1992 paved the way for the real-time transmission of market transactions. In 2001, the Chicago Board of Trade and the Chicago Mercantile Exchange launched their FIX-compliant interfaces.

The commodity market has continued to grow over the years; the volume of commodity contracts traded over the past decade has nearly tripled. At the same time, the price of commodities traded on the standard electronic platforms doubled. But, various factors, like global political instability, economic crisis, trade wars, rapidly evolving technologies, and lastly, the pandemic have made commodity markets extremely volatile.

So that’s it for this week, hope you found this post interesting. please give a like and share this post for support and encouragement…

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