What semantic notions underlie 'backward' and 'backwardness', with the meaning of 'backwardation' below? Etymonline overlooked this term. OED is too brusque and doesn't expound the etymology.

John Hull. Options, Futures, and Other Derivatives (2017 10 edn). p 129.

Normal Backwardation and Contango

When the futures price is below the expected future spot price, the situation is known as normal backwardation; and when the futures price is above the expected future spot price, the situation is known as contango. However, it should be noted that sometimes these terms are used to refer to whether the futures price is below or above the current spot price, rather than the expected future spot price.

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4 Answers 4


I suspect that the term "backwardation" derives from the notion that prices and markets will always rise over time. I can find only circumstantial evidence for this suspicion, however. Hopefully I'm not completely wrong here.

What is backwardation?

It helps to understand what exactly is described by "backwardation." Investopedia has a pretty good definition here, but I'll translate: In backwardation, the price of a futures contract on a given asset is below the expected price of that asset in the future.

For example, let's say the market expects the price of Widgets to be $100 per Widget in January of next year. A Widget futures contract is essentially an agreement to buy Widgets for a certain price at a certain time. A futures contract that lets me buy Widgets in January at $90 (even though the expected price at that time is $100) means the market is in backwardation, because I can buy a contract at a price that's lower than the market expects Widgets to demand at that time.

Note that the relationship is between two future prices, not between the current price and the future price. The relationship between current and future prices determines whether the curve is "normal" (if prices are going up) or "inverted" (if they're going down).

Why "backward"?

The underlying assumption of investing in general is that prices (and other amounts) will always go up, in the long term. I don't have enough of a handle on market theory to explain that easily here, but I will point out that there are a number of investment terms that derive from this assumption:

  • The futures curve itself is called "normal" when prices are expected to increase over time, and "inverted" when they are expected to decrease.
  • When a market goes down, it is often referred to as a "reversal."
  • A stock split in which the number of outstanding shares increases is known as a "forward" split, while a stock split in which the number of shares decreases is known as a "reverse" split.

If we assume that prices are rising (as they are in "normal" futures markets), and we expect the spot price to be, e.g., $100 next January, then a January futures price of $90 is like looking backward to the point at which the price passed that level.

I suspect that this is the semantic connection between "backwardation" and "backward."

What surprises me most about this question is that Etymonline missed Gilbert & Sullivan's 1893 Utopia, Ltd., in which these lines appear:

A Company Promoter, this, with special education,
Which teaches what Contango means and also Backwardation—
To speculators he supplies a grand financial leaven
Time was when two were company—but now it must be seven.


Looking at the definition you included "backwardation" (which I have never encountered before) is given as a price paid to defer delivery of goods bought as futures until the spot price rises to the point where the transaction is profitable.

This has little or nothing to do with "backwardness" which is a term describing the restricted technological, economic or social condition of a country or other community (see the Cambridge Dictionary definition).

"Backward" also used to be used to describe adults or children with varying degrees of learning difficulty and their degree of difficulty would sometimes be referred to as their "backwardness" but this usage is no longer considered socially acceptable.

"Backwardness" could also be used, in theory, to describe the condition of an object which has been placed facing in a direction opposite to the normal orientation or opposite to other objects in the same collection. For instance one could say of a TV set which was facing a wall "I could not see the screen owing to the backwardness of the set" or of a car lot "One car on the forecourt had its tailgate facing the street. The backwardness of this car drew my attention to it". One could say those things but they would be unusual.

I suppose that a deal where a futures price is paid but delivery is deferred could be considered "backwards" in that it is more common for goods to be delivered before or only shortly after payment but I believe that "backwardation" is more likely to be derived from the fact that the goods are "held back" rather than that the deal itself is "backwards".




backward +‎ -ation

Like contango, the term originated in mid-19th century England, originating from "backward".

In that era on the London Stock Exchange, backwardation was a fee paid by a seller wishing to defer delivering stock they had sold. This fee was paid either to the buyer, or to a third party who lent stock to the seller.

The purpose was normally speculative, allowing short selling. Settlement days were on a fixed schedule (such as fortnightly) and a short seller did not have to deliver stock until the following settlement day, and on that day could "carry over" their position to the next by paying a backwardation fee. This practice was common before 1930, but came to be used less and less, particularly since options were reintroduced in 1958.

The fee here did not indicate a near-term shortage of stock the way backwardation means today, it was more like a "lease rate", the cost of borrowing a stock or commodity for a period of time.

(Wikipedia - Wiktionary)

  • 2
    I don't think it is particularly clear from the extract as to how "backward" enters into the equation. It seems to me that the "backward" element comes from "putting back" or deferring payment of the capital sum. The payment of the capital sum is then - upon payment of a backwardation fee" - put back to a later date.
    – Greybeard
    May 20, 2020 at 7:51
  • @Greybeard - see M-W definition. They say which backward to refer to
    – user 66974
    May 20, 2020 at 8:31
  • @Greybeard You're correct. It's not clear to me how "backward" enters into the equation.
    – user50720
    Jun 7, 2020 at 2:21
  • @Accounting - what is unclear to you sorry, it is the literal meaning of backward that enters into the equation. And the notion of backward is clearly related to the financial concept of backwardation (a term invented by the financial community). you need to understand first the financial notion of bacwardation.
    – user 66974
    Jun 7, 2020 at 5:12
  • 1
    All you've done is copy-pasted a definition (from a questionable source too). If you explained what the connection is between the contents of this copied text and what the OP has asked, then support that with the quoted definition, this might come across better.
    – Mitch
    Jun 12, 2020 at 15:34

The word backwardation is likely a slightly shorter spelling of backwardization which would mean to have caused something to become or go backward. Etymology tells us that "-ization" is a word-forming element making nouns of action, process, or state. [etymonline.com]

It is a means of describing a sequence that is moving in the reverse of the direction that was expected. The clumsy nature of the word gives some idea as to the surprise that was found in the new reality. The fact that they are still iffy on which means what is an indication that the terms are still fairly new.

  • 1
    The word backwardation is likely a slightly shorter spelling of backwardization - No. This cannot be so. Consider "to contaminate" - if you contaminate something, you have contamination, but the action of contaminating something is contaminization
    – Greybeard
    May 20, 2020 at 7:44
  • @Greybeard I can only respectfully disagree. The spelling as re-constructed is merely speculation. The analysis whether the action of or the being of is moot as the definition is given. I was only moving the thoughts of the poster along by suggesting another spelling which did yield a world of suggestions. In any event it is clear that the word's origin had none of these subtleties in mind.
    – Elliot
    May 21, 2020 at 1:56
  • Does the answer go away after 3 bad votes?
    – Elliot
    May 28, 2020 at 3:05
  • Don't worry @Elliot I upvoted your answer
    – user385888
    May 28, 2020 at 7:42

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