Origin of Term: London Stock Exchange
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.
In more recent years, a backwardation in equities quoted on the London Stock Exchange has come to signify the unusual occurrence of an individual equities quote whereby the bid appears to be higher than the offer. This (of course) cannot occur for electronically traded stocks via SETS or SETS MM but only for quote-driven stocks (SEAQ)
Read more about this topic: Normal Backwardation
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