Generally speaking, the basic elements of futures trading could be traced back to the 12th Century. History had it that the first futures trading actually started in Japan somewhere around the 18th century.
The futures trading was further enhanced by American later and the popularity spread around the world from there. Today, the American is the big brother of futures trading and naturally the basic elements of futures trading were refined by them.
Chicago Board of Trade (CBOT) which was setup in 1879 was probably the first organized futures trading board setup in the world.
Historically futures markets was developed as a mean to accommodate the volatility of commodity prices. Such intention was fair because the two salient features of futures markets are variability and unpredictability in prices. This made managing adverse price movement a real cause for concern among the commodity supplies and consumers. Hence, the futures market serves to offer a hedging mechanism to handle such problem.
For this reason, using CBOT as a model, in order to have a viable futures market, the following criteria are defined.
| Deep Market | Every futures market must have sufficient number of buyers and sellers in order to provide continuous opportunity for trade, and hence, abundant supply. |
| Easy Grading | Since the focus is on agricultural product, the commodity selected for trading had to be easily graded, and hence standardized grading. |
| Free Fluctuation | In order to create volatility, prices must be free to fluctuate without any government control and monopoly power. |
| Active Participation | Business communities must be ready to participate and regularly in order to provide sufficient liquidity, and hence, producers and consumers of commodities must be committed to use futures as a means to protect their position in the cash market. |
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