A recent Winnipeg Commodity Exchange investigation of Louis Dreyfus Canada involving the 2003-04 feed wheat and canola markets didn’t explore the issue of market manipulation, the WCE says, but it does show that exchange rules are monitored and enforced.
The grain company was fined $500,000 June 12 after an investigation in which it admitted that it broke the exchange’s position limits on wheat and canola contracts five times in 2003 and 2004.
WCE chief executive officer Mike Gagne says cracking down hard on offences like Louis Dreyfus’s sends a message that it doesn’t pay to play around with the exchange’s rules.
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“The important message was, regardless of what the rule is, we have rules that are instituted to ensure that we have fair, transparent and orderly markets, and those rules have to be followed,” said Gagne.
“If they aren’t, we will do an investigation and bring the matter forward to a hearing committee.”
At the time the exchange had recently imposed limits on speculative positions on the front month, or the contract that was heading into expiry, when “long” position holders can force “shorts” to deliver physical grain to close out their contracts.
Many U.S. exchanges have position limits on both front months and later month contracts, while many overseas exchanges have no position limits at all.
In one of the instances cited in the disciplinary notice against Louis Dreyfus, the company held a long position in wheat futures representing more than 26,000 tonnes of feed wheat.
Some market users like and demand speculative position limits because they fear without them, companies with grain handling facilities can manipulate market prices and destroy the convergence that is supposed to occur between cash and futures market prices as contracts expire.
Gagne said the exchange did not directly investigate whether market manipulation occured, or whether the grain company knowingly broke the rules.
“This investigation was to do with exceeding the position limits that we have implemented about three or four years ago. It was not a market manipulation investigation.”
Gagne said the complexity of the marketplace makes it difficult to prove whether certain actions have a direct effect on prices.
Some market users believe there is no way that a grain company could exceed position limits by so much without realizing it, but Gagne said that issue doesn’t really matter.
“Whether it’s something that’s intentional or not is not something that we focus on. It’s the fact that there was a rule violation.”
The harsh penalty – the biggest in WCE history – is due to the grain company’s repeated and large-scale breaching of rules, he said.
“It’s a question of the frequency and the amount.”
The Louis Dreyfus penalty caused gossip among market participants, partially due to the sparseness of the disciplinary notice and partly because news about it leaked out slowly, over days and weeks.
The fine was posted deep inside the exchange’s website and not otherwise announced.
Gagne said this is how the exchange has always made public its penalties and fines. In the days of the open trading floor, a paper notice would be posted and traders would quickly see it and spread the word. Now, with no physical trading floor and no physical bulletin board to use, the website is used instead, in the same manner. But Gagne said the exchange may consider making penalties more visible.
“It’s a good question whether we should be putting out a press release or not, and that’s something we’ll have to review with our special regulatory committee and see if they want us to be more proactive in that regard,” said Gagne.
