Chicago muscles in on gold, silver trade

By Peter McKay –
The Chicago Board of Trade is planning to launch online gold and silver futures that will compete directly with the long-established ones listed on the Comex division of the New York Mercantile Exchange.
People familiar with the move say the CBOT is trying to capitalise on the spate of high prices for metals and, more importantly, its customers’ complaints about the lack of electronic trading at Comex, where gold and silver are only available online after the trading floor closes.

The new CBOT contracts, which will be launched in October, will be pegged respectively to 100troy ounces of gold and 5000troy ounces of silver, the same as the Comex futures. The CBOT already offers thinly traded mini-contracts pegged to smaller amounts of metal, but insiders hope the new full-sized contract will attract larger institutions, such as hedge funds and Wall Street trading desks, that want to place major bets on the direction of prices.
The new contracts aim to offer faster trading than is possible during regular hours at Comex. Market participants say electronic trading will also allow traders to use more complex strategies.
Some CBOT veterans who trade the precious metals contracts via Comex are especially frustrated at the difficulty of putting on spread trades, in which people place simultaneous bets on the price difference between two different months’ contracts. “You’ve got to ease the friction with which people get into and out of precious metals trades,” says Jon Najarian, chief market strategist at Mercury Trading, a Chicago-based futures and options trading firm.
However, talk that the CBOT was considering launching the new contracts has been circulating in commodity markets, and Comex members say it won’t be easy to take volume from their market.
History would seem to bear that out: futures contracts tend to be most successful where there is already an established pool of trading activity. The CBOT’s own experience shows that it’s hard for another exchange to steal futures market share.
The US unit of Eurex, a German-Swiss exchange, this year began offering contracts pegged to US Treasury bonds but the CBOT, which already had Treasury futures as one of its signature products, has kept more than 95per cent of the market share.
In the precious metals markets, both the CBOT and its neighbour, the Chicago Mercantile Exchange, have tried several times to outgun Comex with competing contracts, with little success over several decades. The CBOT has carved out a niche among retail investors with its mini contracts but it has long coveted the more active market in New York.
Since the 1990s, such battles have become even more common among exchanges offering contracts that are directly comparable to one another’s most popular listings in a variety of markets. The new turf wars have been fuelled by a wave of electronic trading and new exchanges, especially in Europe.
With that in mind, a number of the CBOT’s biggest customers approached exchange officials at an industry conference in March and asked the CBOT to list precious metals futures, people familiar with the discussions say.
It is possible that trading will increase in both New York and Chicago once the CBOT launches its contracts, says C.C.Odom, a futures trader and CBOT board member.
The bar is high for the CBOT. At Comex, gold futures volume rose by almost 36per cent to a record 12.2million contracts last year, breaking a 22-year-old mark. Comex silver futures volume rose more than 30per cent to 4.1million contracts.
Source: Australian Financial Review