The London Wool Terminal Market

Abstract

The present study offers an historical outline of the antecedents, establishment and growth of the London Wool Terminal Market. It also examines the problem whether in the long run either side of the market made significant gains. The analysis undertaken indicates that operators maintaining long positions would have made gross profits and certain groups among them also net profits. The findings are broadly consistent with the Keynesian theory of normal backwardation. The absence of definite normal backwardation for close maturities can be explained as the effect of hedgers leaving the market in that phase of their futures' maturity. The interpretation of a price pattern which permits systematic transfers from one group of operators to another as evidence for the payment of a risk premium may be criticized by those who minimize the importance of risk avoidance in hedgers' motivation. How ever, statistics on motivation are even harder to come by than in formation on a great many other factors in futures trading of a less ambiguous nature. If the statistical analysis is accepted, the risk-premium interpretation seems not only the most abvious but the only plausible one. References have been confined to writings bearing directly on the argument and no systematic or historical survey of the literature dealing with the theory of futures trading has been attempted, as this would easily have usurped the role of the main subject.