The Chicago Board of Trade and the Origins of Futures Markets

How does Financial Innovation Happen?

Influence Networks in the Chicago Board of Trade, 1848-80

Chicago Board of Trade,

Jackson & LaSalle Sts

How does financial innovation happen?

• Project scope and importance

• CBOT’s significance

• Exchange culture

• Research strategy

• Support and funding

This research has two objectives:

• Improve our understanding of financial innovation on exchanges

• Improve our understanding of behavioral and organizational dynamics on exchanges

Big money

An exchange is a nexus of:

• Financial transactions

• Legal contracts

• Long-term personal relationships among members

Why study exchanges?

• Big money

• The centrality of exchanges

• The direction of reform and regulation

Chicago Board of Trade

2008

Amsterdam Stock Exchange

ca. 1670

Van der Buerse Square, Bruges

From 1300


1891

The Board of Trade is a good subject for study because:

• Source of many market innovations

• World’s largest derivatives exchange for 150 years

• Rich, unexamined sources of data

• Unregulated exchange

CBOT innovations, 1848-1880

• Invention of futures trading

• Long-distance futures trading between different financial centers

• Leveraged financing

• Cental measurement system (failed)

Within about 5 years, the Chicago grain market went from this . . .

. . . To this

Exchange culture has tribal features:

CBOT Traders Indicted For Fraud

Us vs. them mentality

http://www.huffingtonpost.com/2009/04/01/cbot-traders-indicted-for_n_181818.html

Exchange culture (2)

Complex group behavior

CBOT, 1886

Exchange culture (3)

Racial and ethnic homogeneity

Exchange culture (4): CBOT, 1888-2005

Enduring customs and norms

0

200

400

600

800

1000

1200

1400

1600

1848 1850 1852 1854 1856 1858 1860 1862 1864 1866

as of 12/31

CBOT Membership, 1848-66

Small-world network

Subsidiary questions:

• How do innovations start?

• How are innovations mainstreamed?

• What institutional factors promote or inhibit change?

• How do individual exchange members and cliques figure in this process?

Overall research strategy

• Identify member networks

• Trace financial innovations to their original occurrence

• Connect the two

Identify member networks

• Identify individual members

• Document their connections

• Conduct a social network analysis

Hypothesis 1: networks will be characterized by:

• Family and business relationships connecting members

• Occasional concerted action by members

• Advantages to members

• Relative stability (network outlasts individual members)

Hypothesis 2: members of networks will be:

• Long-term members of the exchange

• Wealthier than average members

• Officers of the exchange

• Business partners and relatives of powerful members

• Living and working in close proximity to one another

Sources of data on CBOT members:

• CBOT annual reports

• Chicago city directories

• Government records

• Newspapers

• Genealogical websites

Possible network member?G. P. Adams

Obituary, Chicago Tribune, September 14, 1890

CBOT member: G. P. Adams

CBOT annual report, 1860-1861


Chicago City Directory, 1860


1860 US Census population schedule

CBOT member: G. P. AdamsCBOT Adams Mills

J. Q. Adams G. P. Adams,

B. Adams

For CBOT members sampled, data sources will show:

• Demographic data

• Family relationships

• Business relationships and career history

• Value of real and personal property

• Business and residential addresses

Trace innovations to first occurrence

• Break down big innovations into smaller ones

• Trace distinctive word usage

• Look for financial indicators (?)

Break down big innovations into smaller ones

Futures trading requires standardized:

• Contract denominations

• Commodity grading

• Delivery dates

• Enforcement

• Clearance and settlement

Trace distinctive word usage:

• Corner

• Contract

• Future delivery

• Short

First Chicago Use of the Term “Corner”

Chicago Tribune, December 9, 1859, reprinting from the Cincinnati Price Current

This research will require support for:

• Data capture and editing

• Text mining

• Social network analysis

• GIS

This research falls into two NSF program areas:

• Computer & Information Science & Engineering (CISE) – Division of Computer and Network Systems (CNS)

• Social, Behavioral & Economic Sciences (SBE) – Division of Social and Economic Sciences (SES)

Programs within CISE/CNS:

1. Interface between Computer Science and Economics & Social Science (ICES)

Programs within SBE/SES:

1. Economics

2. Innovation and Organizational Sciences (IOS)

3. Interface between Computer Science and Economics & Social Science (ICES)

Stated research interests in IOS and ICES programs:

• IOS:

“Innovation and innovation management, organizational effectiveness and evolution”

• ICES:

“How do networks of economic agents form and evolve?”

NSF program deadlines:

• Innovation and Organizational Sciences (IOS) – February 2012

• Interface between Computer Science and Economics & Social Science (ICES) –Deadline not available

Overall NSF funding rates:

• SBE/SES: 19%

• CISE/CNS: 22%

Conclusion—the broader aim of this research is to:

• Improve understanding of financial innovation in general

• Improve understanding of behavioral and organizational dynamics of exchanges

• Develop a method to “decode” influence networks within other exchanges

Second-stage research:

• Other exchanges

• Prosopographic study (group biography)


1999

The Chicago Board of Trade and the Origins of Futures Markets

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