The Winnipeg Commodity Ex-change is boldly going where no North American agricultural commodity exchange has gone before: to full electronic trading of all its contracts.
If the WCE president’s proposal is approved by its board of directors on May 19, the exchange will close its century-old open pit system and trading floor and appear only on computer screens.
If the change is approved, it will probably occur in December, the exchange said.
Gone will be the gesticulating floor traders in their brightly coloured vests, replaced by numbers on an electronic platform operated by the Chicago Board of Trade.
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Farmers may not see much difference. Brokers will continue to serve their usual clients, traders say. But instead of farmer and other client orders being relayed from brokerage offices to traders on the floor of the exchange, all the trading will occur within the trader’s office via computer.
What might affect farmers is the viability of the exchange. Analysts agree that commodity hedgers such as farmers will benefit if the computers mean more trading volume at the exchange, but will be hurt if volume declines.
The changes will be felt most dramatically by traders themselves, who will have to rely on technical analysis of trading patterns once they are no longer in direct contact with other traders on the floor of the exchange.
For the WCE, the goal of the changeover is to increase trading volumes, which is the key to any futures market’s success or failure.
“We see this as an opportunity to increase our volumes,” said WCE president Mike Gagne.
A number of European commodity exchanges have gone electronic and “they’ve seen growth in their commodity markets since then.”
Tony Tryhuk, manager of trading for RBC Investments, said putting the exchange onto computer screens may make it easier and cheaper to use, and therefore bring in more players.
“We hope there are enough passive people on the sidelines who would look at our market now and say, ‘we’d like to trade you now we have easier access,’ ” said Tryhuk.
The WCE’s contracts will now appear on the CBOT screens that list the Chicago contracts, possibly engaging the interest of commodity speculators who have so far ignored Winnipeg.
But Tryhuk said the move to electronic trading is a leap of faith because no one knows if new players will come in to replace the volume lost if Winnipeg-based independent speculators, known as locals, back away from the market once it’s electronic.
“Given that (the locals) are likely to lose the edge they have now, will they continue to participate?” wondered Tryhuk.
Randy Strychar, an oats market analyst who traded grain for many years for Xcan Grain in Winnipeg, said he understands the theory of the switch, but doesn’t know if it can be achieved.
“Where is this new volume going to come from,” said Strychar. “You need volume to get volume. You’re going to lose your locals. That’s volume.
“I hope they’re right (about attracting new players).”
Tryhuk said commodity trading companies like his did not expect the WCE to be the first agricultural exchange in North America to ann-ounce plans to go to complete electronic trading.
“We thought the exchange would wait to see it successfully done elsewhere, then tried here,” he said.
North Dakota State University economist Bill Wilson said the move is logical.
“It’s a natural solution for low-volume commodities,” said Wilson, who has worked with the Minneapolis Grain Exchange. “Once you move away from these huge commodities like corn and soybeans, the cost of operating exchanges is pretty high on a per-unit basis. The cost of open pit trading ends up being pretty high.”
Volume discount
The CBOT only offers electronic trading overnight. During the day, trading is still carried out by floor traders. Wilson said it is not surprising to see a smaller exchange like Winnipeg propose the shift to all-electronic because the giant Chicago exchanges may never have to do it.
“Those are huge, huge trading pits with very large volumes,” said Wilson. “They may be sustainable because the large volumes mean the cost of trading is low.”
Gagne believes electronic trading can suit agricultural futures contracts. A common belief among commodity traders is that electronic trading works well for interest rate futures, other financial futures and for some physical commodities, but that crop commodities are different and need the human element.
Wilson agreed with Gagne’s view.
“If you ask why (electronic trading won’t work for agricultural contracts) all you get is a bunch of blurry eyes,” said Wilson. “No one has an answer as to why.”
Ken Ball, a broker for Benson Quinn-GMS in Winnipeg, said he will miss floor traders because they have good advice and can catch problems.
“I rely heavily on the feedback from the traders on the floor as to what’s going on,” said Ball.
“A human being will also often prevent me from making a very foolish error, and a computer won’t.”
But Ball, Tryhuk and other traders are getting used to the idea of all-electronic trading, because they won’t have a choice.
“I would prefer to stick with the pit trading, but it appears to be a done deal,” said Ball.
