First recorded use of hand signal arb and also the first dumbass trading clerk

photo credit risklearn.com

I really enjoyed reading the Harvard Business Review study on The Dojima Rice Market and the Origins of Futures Trading and highly suggest it to all who have an interest in the early history of futures trading.  It's a quick read at 21 pages and well worth the $6.95 cost.

The Appendix of the case study shares a wonderful story, written in 1706, which illustrates that some aspects of trading just never change. The story also records the first use of hand signal arb that I've seen so it's also an exciting historical reference!  Amusingly, what can be considered the first of a long line of dumbass trading clerks is also part of the narrative. 

The race to minimize latency continues ever more so today and like the impending Virtu IPO filing which noted a near perfect string of winning days, except for one losing day due to human error, it's not that far removed from this story from 300 years ago: 


Bunryu Nishiki, Kumagae Onna Amigasa (Kumagae Lady's Hat), written in 1706, translated by

Mayuka Yamazaki.

There was a merchant named Yozaemon Sumiya who had lived in the town for a long time. He had run a liquor business and recently started a wholesale business selling clothes. He was one of the three most influential figures in the town. Yozaemon's first son, Yomiji, was 23 years old and said to be the most dexterous person in the country. . . . One day Yomiji told his father Yozaemon, "Recently, neither the liquor nor the clothes business is making much money. The margins on these businesses are not high. . ..What I have been thinking is that it would be impossible to make my own way in life without being involved in a large-scale business. As a start, I would like to visit a wholesaler in Koriyama and examine the rice business there." Yozaemon thought what Yomiji said made perfect sense. . . . Yozaemon collected all the money he possessed, gave Yomiji 600 ryo of gold, and dispatched his son to Koriyama.

As soon as Yomiji arrived at the wholesaler in Koriyama, he started a moneychanging business. In order to get information about daily prices at the rice exchange, Yomiji hired a regular express messenger (hikyaku) and another messenger. A minute after the rice exchange started the business of the day in Osaka, the [second] messenger wearing red hat and red gloves ran like a flying bird and arrived at Kuragari Pass. He stood by a landmark pine tree and tried to regain his breath. If he raised his left hand by 1degree, it meant the rice price increased by 1bu of silver. If he raised his right hand by 1degree, it meant the rice price decreased by 1bu of silver. His role was to inform Yomiji of the increases and decreases of rice prices. Yomiji saw the person's signals from the second floor of the wholesale store using a telescope which had a range of 10 miles, and bought or sold rice taking these price changes into consideration. After that, Yomiji [publicly] dispatched the express messenger to Osaka to obtain the rice prices there. As Yomiji knew the rice prices earlier than anyone when the information was delivered to Kuragari Pass, there was not a single day that Yomiji did not make money. Other merchants had no idea about his scheme. They gave Yomiji the nickname "Forecasting Yomiji" and rice prices in Koriyama came to be greatly influenced by Yomiji's transactions.

One day, when the messenger was running to give Yomiji his signals, he met a merchant returning from the Yamato region by the name of Sogen Nakamachimaruya . . . . Sogen was in a good mood after having a few glasses of sake and he asked the messenger to have a few drinks with him. The messenger, feeling great after a few glasses of cold sake, recounted various stories he had heard during his 10-day stay in Osaka. . . . He had another two to three glasses of sake. The messenger then parted with Sogen, saying that he would treat Sogen in the future, and started to run again. The road was rough. . . . He was late. He made his best effort to run as fast as he could, swinging both his hands like a crab, but ended up arriving at the pine tree four hours later than planned, as 7--8 glasses of sake had broken his stride. Yomiji was waiting and waiting, sitting on the second floor of his wholesale store and constantly looking into his telescope . . . . Finally the messenger in a red hat and red gloves appeared and stood by the landmark pine tree. The 7--8 glasses of sake greatly affected his memory, and he did not recall whether he should raise his left hand or right hand. He tried hard to recall, but he could not remember anything. . . . Finally he raised his left hand by 6 degrees, and Yomiji bought 30,000 koku of rice, believing that the rice prices had increased by 6 bu of silver. . . Actually the rice price was down by 7--8 bu of silver on the day and the express messenger soon brought the news. . . . Yomiji realized he had made a losing transaction, but it was already too late. The loss cost him 24 kan (90kg) of silver.

Origin of Eurodollar futures

(eurodollar pit pictured above from my book Trading Pit Hand Signals, I would've uploaded the digital file but that would've violated my license agreement w/Getty Images.  Can click to enlarge for better detail and the photo was taken from the top of the back months, in 2004 I believe)

Russia's incursion into Crimea and the Western, particularly US, posturing about economic and financial consequences brought to mind the earlier circumstances which created the enormous eurodollar futures market.  The above picture illustrates how large the market was when it was floor based and it's only grown since transitioning almost fully electronic.  As I traded in there and continue to make it the only market I trade (electronically now), my bias is apparent in calling it the greatest pit that ever existed.  Whereas other large pits were generally momentum (some use the term "meathead") oriented such as the S&P or bond pits, the eurodollar market is a big chessgame based upon spreading which explains why it grew exponentially. 

Getting back to the original topic, the eurodollar market was developed in the early 1950s as Communist governments moved their dollars outside US jurisdiction to avoid potential confiscation or asset freezes. 

Wikipedia presents a succinct historical account:

"Gradually, after World War II, the quantity of U.S. dollars outside the United States increased enormously, as a result of both the Marshall Plan and imports into the U.S., which had become the largest consumer market after World War II.

As a result, enormous sums of U.S. dollars were in the custody of foreign banks outside the United States. Some foreign countries, including the Soviet Union, also had deposits in U.S. dollars in American banks, granted by certificates. Various history myths exist for the first Eurodollar creation, or booking, but most trace back to Communist governments keeping dollar deposits abroad.

In one version, the first booking traces back to Communist China, which, in 1949, managed to move almost all of its U.S. dollars to the Soviet-owned Banque Commerciale pour l'Europe du Nord in Paris before the United States froze the remaining assets during the Korean War.

In another version, the first booking traces back to the Soviet Union during the Cold War period, especially after the invasion of Hungary in 1956, as the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter. The British bank would then deposit that money in the US banks. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. On 28 February 1957, the sum of $800,000 was transferred, creating the first eurodollars. Initially dubbed "Eurbank dollars" after the bank's telex address, they eventually became known as "eurodollars" as such deposits were at first held mostly by European banks and financial institutions. A major role was played by City of London banks, as the Midland Bank, now HSBC, and their offshore holding companies.

In the mid-1950s, Eurodollar trading and its development into a dominant world currency began when the Soviet Union wanted better interest rates on their Eurodollars and convinced an Italian banking cartel to give them more interest than what could have been earned if the dollars were deposited in the U.S. The Italian bankers then had to find customers ready to borrow the Soviet dollars and pay above the U.S. legal interest-rate caps for their use, and were able to do so; thus, Eurodollars began to be used increasingly in global finance."

Now with the eurodollar market well established, Putin doesn't need to focus on asset sheltering during an invasion and can instead spend more time doing what he does best: dangling and sniping.