How Wall Street got snowed on weather derivatives

FORTUNE — Wall Street is no longer minting money off the snow. But it’s still trying.

A few years ago, the market for financial contracts based on snowfall was, for lack of a better phrase, heating up. More and more firms began popping up to sell the specialized weather derivatives. Insurance firms hired traders who would focus on buying and selling the contracts. The Chicago Mercantile Exchange listed dozens of contracts based on snowfall in numerous cities that could be traded like stocks, and were expected to rise and fall daily based on the forecast. A number of large Wall Street firms seemed interested in getting into the market.

These days, though, Wall Street’s market for betting on snow has, well, melted. The CME says that not a single snow-related weather contract traded in 2013. That’s down from 510 trades in 2011.

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“The market took off quickly, but then it never hit critical mass,” says Jeff Hodgson, who heads the Chicago Weather Exchange and had sought to specialize in snow derivatives. Now Hodgson is focused on contracts tied to temperature or rainfall for utilities or farmers.

Edgar Bautista, who co-heads weather and commodities markets at AXIS Capital, says he hasn’t traded a snow-related contract in over two years. “I used to see a lot of interest from municipalities that wanted to insure against the costs of snow removal,” says Bautista. “But I haven’t seen them in quite a while.”

In theory, the market for snow-related weather derivatives should be huge. Snowstorms can affect lots of businesses. And often you hear about billions of dollars in economic damage from blizzards. Typically, the contracts are priced based on the expected inches of snow in a particular time period in a given city. If accumulation is greater than the set amount, the seller of the derivative has to pay out. But if the snowfall is less than that figure, the contract will expire worthless. Along the way, the contract can rise and fall in price.

CWE’s Hodgson says most contracts are sold by early November and run through March. Late last year, you could have bought a snow contract for $30,000 that would have paid out $100,000 if it snowed more than 50 inches in New York City. New York’s snowfall, even including the most recent storm, as measured at LaGuardia Airport, has been 14 inches. So that contract still looks like a long shot.

The lack of interest can be partly chalked up to the fact that, up until this week, there has been a lack of snow. It turns out there are many more companies that want to protect themselves against too much snow than too little. Large ski mountains, perhaps because they pre-sell season tickets, never took an interest in the market. Vail Resorts (MTN), for instance, a public company that owns its namesake mountain as well as a number of others, says it doesn’t use weather derivatives to mitigate losses when snow is light.

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Wall Street made a killing in the winter of 2011-12, which saw a record lack of snow across the U.S. Since then, buyers of the contracts, who lost money on the insurance, have failed to come back.

In general, the markets for more esoteric derivatives have dried up since the financial crisis. That could be hurting demand for weather contracts as well. Also, given the effects of climate change, the number of people expecting record snowfalls is rapidly shrinking.

It’s probably too late for this year. Still, snowstorms like the one that hit the East Coast on Friday give Wall Street hope.

Hodgson says there is still an active market in over-the-counter snow contracts specifically tailored to a single company. But the market tends to be dominated by specialty firms, not big banks, and it tends to behave more like insurance rather than a financial contract. Hodgson says he thinks the lack of a good index for the market, like the S&P 500 (SPX) for stocks, has made weather derivatives hard to trade.

eWeatherRisk CEO Brian Ohearne says his company is trying to develop snow contracts that are based on the number of storms rather than the absolute number of inches. He thinks those contacts will be more popular.

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