Chicago Board of Trade (CBOT) history

A commodities and futures exchange established in Chicago in 1848. Originally designed as a commodities marketing exchange, the board quickly became devoted to trading in futures contracts. During the Civil War, the exchange became prominent by buying and selling futures contracts on staple commodities such as wheat and corn. By the 1880s, the exchange was the bestknown business enterprise in Chicago. Other similar exchanges were also developed in St. Louis, Kansas City, and Minneapolis.

Originally, the CBOT and other commodities exchanges traded contracts that guaranteed buyers and sellers prices and deliveries on a specific future date—but the actual contracts were not negotiable after being originated. Traders quickly developed a market, and soon speculation became the primary activity on many of the exchanges. The Chicago Board of Trade especially became known for corners and bear raids, massive speculative operations by traders and speculators conducted on the floor, or pits, of the exchange. In corners, traders would try to corner the entire supply of a commodity using both physical commodities and futures contracts in order to exact higher prices. In bear raids, commodity contracts were sold short, forcing down prices. These operations became so notorious that they attracted other operators who would try to entice small investors to gamble on commodities in BUCKET SHOPs. The CBOT achieved a notable victory over the incursions made by the bucket shops in a U.S. Supreme Court decision in 1905, Board of Trade of City of Chicago v. Christie Grain & Stock Co. The Court denied the bucket shops information generated on exchange prices and transmitted by the Western Union Company.

By the 1890s, the Chicago Board of Trade became the largest futures market in the world and began a drive to force the bucket shops out of business. The market prospered during World War I and began adding new contracts to those already traded in the pits. These contracts were for agricultural commodities. The exchanges were all restrained somewhat by a series of commodities trading regulations passed in the 1920s and 1930s and were limited by measures passed during World War II to restrain prices and speculation.

During World War II, exchange activity declined significantly as price controls on many commodities curtailed speculation and restricted trading in many commodities. New contracts began to develop after the war, and contracts began appearing on nonagricultural commodities that severely strained REGULATION on trading because they were not included in the Commodity Exchange Act passed in 1936.

In the 1950s and 1960s, the CBOT began adding new contracts again in order to maintain its spot as the largest futures exchange. It added contracts on livestock to the agricultural commodities it already traded. But the biggest change to its way of doing business came in the early 1970s, when it began experimenting with financial futures and options. Since options on futures contracts were prohibited at the time, the exchange helped develop the Chicago Board Options Exchange (CBOE) in 1972. The new subsidiary traded options on common stocks independently of the Chicago Board of Trade. The CBOE soon became the largest options exchange in the world.

Also beginning in the early 1970s, the CBOT began introducing contracts on financial instruments. It was soon trading futures contracts on Treasury securities and financial indexes. A crosstown rival, the International Monetary Market, developed by the Chicago Mercantile Exchange, established in 1919, began offering contracts on financial instruments at the same time, and the two became the largest financial futures exchanges in the country. Options trading remained on separate exchanges even after options on futures contracts were reintroduced after the COMMODITY FUTURES TRADING COMMISSION was established in 1974. The commission became the first significant regulator of the futures exchanges, covering all futures products, not only those on agricultural commodities.

In the 1990s, many of the exchanges began experimenting with electronic trading and links with foreign futures exchanges. The Chicago Board of Trade (CBOT) retained its open outcry system in the pits, with floor traders known as market makers remaining the ultimate source of prices.

See also FUTURES MARKETS; OPTIONS MARKETS.

Further reading

• Geisst, Charles R. Wheels of Fortune: The History of Speculation from Scandal to Respectability. New York: John Wiley & Sons, 2002. 
• Lurie, Jonathan. The Chicago Board of Trade, 1859–1905: The Dynamics of Self-Regulation. Urbana: University of Illinois Press, 1979. 
• Taylor, C. H. History of the Board of Trade of the City of Chicago. Chicago: Robert O. Law Co., 1917.