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How Bad Weather Built The 'World's Biggest Markets'

The Mercantile Exchange building in Chicago in 1929.
The Mercantile Exchange building in Chicago in 1929.

You can blame a lot of things on the weather — even the futures market.

Emily Lambert, author of The Futures: The Rise of the Speculator and the Origins of the World's Biggest Markets, tells Weekends on All Things Considered host Guy Raz that it was Chicago's cold winters that triggered the beginning of commodities trading.

The futures market trades in abstract commodities rather than actual goods. For example, a contract might lock in the price for a quantity of corn to be delivered at a future date. Traders essentially make or lose money depending on how well they've predicted the price of corn on that date.

These days, the corn itself might not matter much in futures transactions, but in the beginning, it was all about hedging bets against bad weather, spoilage — or an accidental dump in the river.

Farmers Meet Gamblers

In the mid-19th century, the Chicago River transported grain from Illinois farmers for sale in the city. It could be a slow trip fraught with hazards, Lambert says.

"The river would freeze up, and they couldn't get their grain to Chicago, and there was a delay," she says. "During that delay, there was the risk that the price of grain would fall."

At the time, gambling was in style. That risk created an opportunity for speculators to make a hefty profit.

"Chicago was a boom-and-bust kind of town," Lambert says. "It was growing like mad. Basically, there were a lot of people in the city who were looking for opportunities and looking to make their fortunes — and looking to take risks."

In 1848, grain traders formed the Chicago Board of Trade. Then, in 1898, they created the Chicago Butter and Egg Board, which would eventually become the Chicago Mercantile Exchange. Together, those boards composed the original, most bustling futures market in the world.

Getting Into 'The Pit'

Making it into the Chicago Mercantile or the Chicago Board of Trade was like trying to join an exclusive country club. To be a trader, you had to be a member, and in order to be a member, you had to have someone else vouch for you. Lambert says most people started on the floor as runners, taking slips of paper from traders who were making deals in a frenzy and bringing them to the back office.

"Then you might graduate to working on the phone, taking orders from people calling in," Lambert says. "And then you might become a broker, who was in the pit, or a trader, trading for yourself in the pit."

The pit is an octagonal area that used to be filled with men screaming orders and prices at each other (think of the movie Trading Places). Although both the Chicago Mercantile and the Chicago Board of Trade had pits, the characters in each were a part of very different cultures.

"The Chicago Board of Trade was identified most closely with the southside Irish community of Chicago," Lambert says. "The Chicago Mercantile Exchange, a few blocks away, was predominately Jewish."

The two exchanges were rivals. "In fact, they developed a boxing match every year," Lambert says.

Today that rivalry is mostly gone, and because of the switch to electronic trading, the pits are almost empty.

Corruption Makes A Comeback?

The futures markets were easily corrupted at the beginning, but over the next few decades, Lambert says, they became regulated markets and worked reasonably well. Today, gaming the market is making a comeback.

"Now, there are also related derivative markets and those derivatives markets [are], one might say, like the futures markets in the late 1800s," Lambert says.

Over the past few years, the derivatives market has come under considerable scrutiny for its role in the current financial crisis. With a notional value of $1.2 quadrillion, it's no surprise some regulators are pressing for a serious overhaul. The story sounds familiar to Lambert.

"It's almost like we're living back in Chicago in the 1800s," she says. "We're hammering out the kinks of the market so that the markets will continue to function."

Copyright 2023 NPR. To see more, visit https://www.npr.org.