The Winnipeg Commodity Exchange is trying to create more “locals,” even if they exist on the other side of the planet.
The exchange has a Liquidity Provider program that is attempting to create more short-term traders to increase its volumes.
The exchange lost a number of its local traders who worked on the floor of the open outcry pit when it switched to electronic trading.
It hopes this program brings new players to supplement the nine locals who stayed with the exchange.
“In order to attract new participants in that type of category, we’ve offered incentives to enhance short-term trading,” said WCE vice-president Will Hill.
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“You can’t have people who are frequent traders inhibited in their trading by transaction costs.”
Locals make their money by rapidly buying and selling futures contracts, relying on their sense of market momentum to jump into and out of a position in anticipation of price rises and falls.
Because most futures and options transactions are charged a fee by the exchanges they are traded on, the small profits locals make from correctly guessing the direction of the market can be lost by a piling up of fees over the course of a trading day.
Because of that, most exchanges offer reduced fees to short-term traders, as the WCE did for locals in the open outcry pits.
For the first six months of electronic trading, locals pay no fees at all.
The Liquidity Provider program is offering reduced fees to out-of-Winnipeg short-term traders to lure them into the market.
So far one company, Kottke Associates LLC, has signed up as a short-term trader.
“We expect to see more,” said Hill.
Short-term traders are speculators, but hedgers, including farmers and commercial users of commodities, rely on their existence to make it easy to buy and sell contracts and keep price spreads reasonable.
When there is not enough short-term trading, as has happened with a number of WCE contracts that have been delisted, it becomes hard to close out a contract position and often the price needed to close the position is much poorer than it should be.
If there is a lot of trading it is easy to close out a position and the price will not vary wildly from trade to trade.
