Making the grade: infrastructural semiotics and derivative market outcomes on the Chicago Board of Trade and New Orleans Cotton Exchange, 1856–1909

Abstract

This paper contributes to a socio-technical analysis of derivatives by offering an infrastructural explanation of divergent outcomes on two early American futures markets. It takes as the starting-point of analysis the classification systems by which these futures markets were constitutively linked to underlying markets in agricultural commodities. Despite the formal similarity of these systems, their contrasting implementation – i.e. how grading was accomplished and integrated into practice – produced classifications with dissimilar semiotic qualities. This semiotic distinction is shown to have promoted divergent economic behaviours and outcomes on the two markets: high-risk speculation and volatility on the Chicago Board of Trade, low-risk hedging and stability on the New Orleans Cotton Exchange. The paper thus argues that treating classifications in their semiotic capacity yields an analysis that can connect foundational infrastructures and market-level outcomes in meaningful, non-deterministic ways.

Keywords:

• derivatives
• infrastructure
• classification
• semiotics
• social studies of finance

Acknowledgements

I would like to thank Akos Rona-Tas, Juan Pablo Pardo-Guerra and Martha Lampland for their guidance and insight on this paper and the dissertation of which it is a part, as well as the editors and two anonymous reviewers for their helpful comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Futures are a simple type of derivative. They are contracts that bind a buyer and seller to trade a particular class of commodity at a designated price at some specified future date. The price agreed to in a futures contract is thus a function of the underlying entity’s current price and anticipated future fluctuations.

2 I use the terms ‘classification’ and ‘grade’ interchangeably in reference to my cases. But this equivalence should be understood as particular to these instances. Since ‘grade’ implies a scale while ‘classification’ does not, the two terms are not interchangeable in all circumstances. For this reason, in theoretical contexts, I use the more inclusive ‘classifications’.

3 Icons signify through their resemblance to their object (for example, a picture of a cigarette with a slash through it indicating, ‘No Smoking’); indexes signify through pointing to their object (for example, dark clouds and strong winds as a sign of impending rain); symbols signify through their connection to other symbols and their associations (for example, words, which are meaningful primarily through their connection with other words in a language). Any sign can signify in any combination of one or all of these modes.

4 The notion of fidelity is prefigured by Muniesa, who argues that signs ‘work well’ when they signify ‘unanimously and durably, at least to a certain degree and for a certain public’ (2007, p. 387).

5 CBOT did briefly institute such a rule in October, 1868, but it was widely ignored by members, unenforced by the directorate and repealed within months (Lurie, 1979).

6 The study ends in 1909, a year when a number of transformative changes began on both exchanges. First, in this year, NOCE made a significant change to their grading system, implementing a centralized agency for grading contract cotton. Then, beginning in 1915, both exchanges experienced brief shutdowns and extensive price controls imposed by the federal government in response to World War I. Following the war, the federal government took control of the grading process, passing the Cotton Futures Act in 1916 and the Futures Trading Act of 1921. Because of these significant and rapid changes after 1909, I end my research at that point to maintain a general level of continuity over the course of the study.

7 In the first case, the Iowa Company’s elevator burned to the ground, and an examination of the remains revealed the shortage in grain compared to receipts. In the second, Munn & Scott elevators went bankrupt, and in the sale of their holdings to Armour & Co. the shortfall of wheat in store had to be revealed (Taylor, 1917).

8 The amount of this premium or discount was determined at the close of every trading day by NOCE’s Committee on Classification and Quotations.

9 Classers used multiple senses to judge the quality of cotton, visually inspecting the purity of lint and colour, feeling for slight differences in body and listening for the ‘cry’ of the cotton as it was separated to judge staple length and strength of the fibre. Cotton classing was thought of by many as an art requiring incredible sensitivity and dexterity. As one merchant claimed: ‘The hands of a cotton classer should be as soft as a debutante’s and as supple as a violinist’s’ (Garside, 1935, p. 77).

10 Corners were disruptive, but entirely legal, price manipulations that relied on letting traders build up large speculative positions in the futures market, then forcing them to settle in actual commodities – i.e. forcing a shift from treating classifications as symbols to treating them as indexes. In a corner, trader A would buy futures contracts from a number of different parties. He would simultaneously buy up the supply of the actual commodity promised in the contract. When the contracts came due, he would demand they be settled by delivery, at which point his counter-parties would find that Trader A, himself, was one of the only available sellers. Trader A would then sell his goods to the desperate, cornered parties at a highly inflated price, making a handsome profit.

11 This argument is, of necessity, theoretical. No permanent record of trades was kept, making it impossible empirically to determine what percentage of trades were made as hedges versus speculation.

12 This was a way of simplifying the multi-part transaction that would otherwise take place. The multi-part transaction is this: Trader A would buy receipts in the proper quality and amount at the current spot market price, say $1 per bushel; he would then sell these receipts to Trader B at the price pre-arranged in their contract, say $1.02 per bushel; Trader B would then sell these receipts on the spot market to Trader C, earning himself $0.02 per bushel on the deal. Settling by difference collapsed these three transactions involving wheat to one transaction involving only cash: Trader A pays Trader B $0.02 for every bushel contracted for in the futures contract. Both traders have the same losses and gains they would have in the multi-part transaction.

13 Though not featured in either of these cases, iconic infrastructures also exist. The clearest example of an iconic infrastructure is a field guide, a pictorial system for classifying species of birds or plants. Iconic infrastructures are unique among the three types in that their status as infra-structural is most likely to fluctuate. While in routine cases of classification these icons are used passively as a background guide for everyday practice, they are also actively referenced in more difficult cases: birders carry field guides in their packs and refer to them when they spot an unfamiliar species. Iconic infrastructures thus move fluidly between being infrastructures that invisibly support tasks and being highly visible tools.

Additional information

Notes on contributors

David Pinzur

David Pinzur is a graduate student in sociology at the University of California, San Diego (United States). His dissertation research is on the creation of futures markets in post-bellum Chicago and New Orleans.