Trading rules

LCA Arbitration room

LCA Arbitration room 1930s

A new kind of trading

Liverpool developed Europe’s first ‘futures’ market. Because cotton was grown in distant countries, the price could change during the long journey to Liverpool. To protect against this, merchants and brokers started ‘forward’ selling cotton shipments before they arrived in Liverpool.

Improvements in communication, like the fast transatlantic mail ships, the telegraph cable and eventually the telephone meant that information from cotton growing areas could get to Liverpool more quickly.

Instability in cotton prices during the American Civil War led to a standard contract being developed. These could change hands before the delivery date, attracting speculators who had no interest in buying actual cotton. They hoped to buy low and sell high. This could affect the true price of cotton.

All branches of the British cotton trade were using the Liverpool futures market by the end of the 19th century. It became so important that some firms made more money from brokering futures than selling actual cotton on the spot.

Liverpool and beyond – the International Cotton Association

Liverpool cotton brokers established a set of rules to be followed when trading. Today 60% of the world’s cotton is still traded using these rules.

Cotton traders met regularly from the early 19th century. In 1841, the Liverpool Cotton Brokers’ Association was formed. By 1863, it had formulated rules for trading cotton. In 1882, a new association was formed, which included the merchants and spinners as well as the brokers. This was the Liverpool Cotton Association and was governed by an agreed set of trading rules. These rules remain in existence today and form the basis for arbitration and resolving disputes.

In December 2004, the Liverpool Cotton Association became the International Cotton Association reflecting the increasingly global nature of the cotton business. Still based at the Cotton Exchange in Liverpool, it has members in over 60 countries. The Liverpool rules are now the International Rules and are translated into many languages.

Settling disputes

Disputes sometimes arise between the merchant and the buyer of the cotton. Sometimes, the cotton supplied does not match up to the quality of the sample. The ICA has an arbitration process that can help settle these disputes. This tries to reach an agreement or compromise between the two parties. If they do not agree with the decision, they can appeal. Ultimately, the Liverpool roots of the ICA standard contract means that arbitrations can end up being settled in English courts. Therefore, English courts can rule on international deals

Next: read about the cotton war