Derivative instruments have been used since ancient times by the Babylonians in Mesopotamia. While its use was evident in one form or another many centuries later, there was no officially organized market for it. That changed in 1728 when the world's first official exchange, the Dojima Futures Exchange, in Osaka, Japan, was authorized to operate by the Tokugawa Shogunate. It continued to operate up until 1939, before its dissolution by the Meiji government. During the Tokugawa period, rice was vital as currency and a means of feeding the population. Thus, rice trading was essential. In its early form of trading, merchants traded forward contracts with farmers. As rice trading evolved, the merchants experimented with financial contracts to enhance market efficiency. Eventually, they settled on the Rice Bill, a standardized future contract. Trading rice bills was not authorized for some years, but the Shogun had a vested interest in keeping the price of rice stable. Thus, futures trading became official at the Dojima Futures Exchange.
In this scene, traders were exchanging hand and verbal signals to perform future transactions in the open-outcry pit. Such a method of trading has been the norm since 1970. An additional method of executing trades was added in 1992 when the CME Group introduced its electronic trading platform, Globex, to the Market. Exploiting digital technology and rapid information exchange provided broader Market access to the general trading public and increased liquidity. Its implementation began in pre- and post-market trading sessions. Together with the open-outcry pit, nearly 24 hours of trading was possible. With time, Globex became the predominant method of executing trades at the exchange. On 19 October 2004, it recorded the first 1 billion transactions of contracts, thus overtaking open-outcry pit trading volume. In February of 2015, pit trading only contributed to about 1% of the transaction volume at the CME. Later that year, the CME Group closed its 20 main pits. As of today, electronic trading is the dominant method of trading and is mainly done virtually via a computer screen anywhere in the world.
The picture above depicted a scene of merchants and traders trading on the octagon, also known as the pit. The activity occurred in the Chicago Board of Trade (CBOT), organized by its members in 1864 to trade futures on soft commodities such as wheat and corn. Starting in 1898, the Chicago Egg and Butter Board forked from the CBOT to trade only eggs and butter futures. As time progressed, it was reorganized to become the Chicago Mercantile Exchange (CME) in 1918. Throughout its existence, the CME inventory of tradable future contracts morphed from eggs and butter to pork bellies and stock indices. To improve general market access, the CBOT merged with the CME in 2007 to form the CME Group, which became the largest futures Market in the world. Throughout exchange acquisitions, the CME Group now includes the CBOT, New York Mercantile Exchange (NYMEX), and Commodities Exchange (COMEX). As of today, it is still the largest futures Market.