A free market lives if it breathes an air rich with fairness, openness and honesty.
A free market suffocates when the air becomes toxic with suspicion, skepticism and paranoia.
The Winnipeg Commodity Exchange is facing a crucial dilemma that it may not even understand exists. It has just proven that it is an honest broker and a righteous custodian of its free market for prairie crops, but the way it proved it has caused a dangerous combination of suspicion, skepticism and paranoia that could, over time, threaten its existence.
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Here’s how it managed to create the dilemma: the exchange discovered that grain company Louis Dreyfus had repeatedly and massively exceeded its position limits on expiring contracts. The WCE imposed a $500,000 fine on Louis Dreyus, the biggest sanction in its history.
This can’t have been the most comfortable of situations because Louis Dreyfus is one of the giant multinationals of the world food trade and the WCE is about the tiniest exchange in agriculture. However, the exchange persuaded the company to accept its finding of malfeasance and accept the dramatic consequences.
So much, so good.
But the exchange never drew attention to this matter.
There was no News release
news. Instead, the information was released deep inside the exchange’s website, where most would never look.
Many exchange participants didn’t hear about the record-setting penalty for weeks after it was levied and posted, and when word did leak out, it did so in the form of a secret; a scandalous whisper.
Rather than being heralded as a case of the exchange rigorously policing its users, it seemed to many like a sleazy secret that neither the exchange nor the grain company ever wanted to see aired.
In the absence of a forthright announcement, speculators concocted theories and came up with unanswered questions, spinning this situation from one of a successful action to one in which the big boys had settled something quietly, behind closed doors.
This is a problem when dealing with farmers, because woven deep into the fabric of the prairie farmer’s mind is suspicion of the grain trade and of the free market itself.
Farmers have long suspected that powerful forces behind the scenes manipulate the marketplace they are told to trust.
A succession of non-market institutions, such as the wheat pools and the Canadian Wheat Board, were erected to remove farmers from what they didn’t believe was a “free” market.
Farmers need to know that the exchange will nail a major, multinational grain company that breaks the rules, just like it would nail them if they cheated on a grain contract.
It’s something the exchange, in trying to build confidence with farmers, needs to highlight, especially because it’s hoping to take over the hedging role that the wheat board now plays with much of the Prairies’ wheat and barley.
Method, results different
The exchange did nothing wrong here.
Until a couple of years ago, a disciplinary notice would have been posted on the exchange floor’s bulletin board. Now that there’s no trading floor, the exchange has moved the disciplinary notices to the equivalent part of its website, where the trading has migrated.
But what the exchange is now grappling with, in the light of this matter, is the radical difference between a trading floor teeming with live traders, and its new electronic-only existence.
Until a few years ago, a couple dozen traders would have passed by the disciplinary notice the day it was posted and at least a few would have stopped to read it. Then they would begin chattering about it and within an hour, pretty well the entire marketplace would have known.
Ironically, the electronic existence that has made WCE futures and options trading almost instantaneous has radically slowed the dissemination of information about anything but contracts. The people aren’t together to chatter and gossip, and the human factor so vital to communications is lost.
So when people find out belatedly about something like the Louis Dreyfus fine, they feel annoyed and suspicious because they feel cut out of the loop.
A heavy penalty like this is something the exchange should trumpet, not be shy about, and even if there was no nefarious motive behind the quietness, there’s no excuse to have it happen again.
The exchange needs to accept that part of its move to electronic-only means that it needs to do much more to communicate with its marketplace, even if that breaks with tradition. It can no longer rely on modest gestures that will be amplified and projected by the loud chatter of the traders.
Two years ago it banished that chatter by banishing the floor traders. Now it needs to fill that void with its own positive noise, or it will create the vacuum that suspicion, skepticism and paranoia will fill.
