The Winnipeg Commodity Exchange went all electronic and trade has been booming.
The Kansas City Board of Trade’s wheat contract has stayed overwhelmingly non-electronic and trade has been booming, as it has in the mostly non-electronic wheat pits of Minneapolis and Chicago.
In the New York Board of Trade’s main agricultural pits for sugar, coffee, cocoa and cotton, trade has been booming without electronic help. At the same time, electronically traded contracts for sugar, coffee and cocoa at the London International Financial Futures and Options Exchange are surging in popularity.
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Which raises the question: does the debate over electronic versus open outcry trading have any relevance to the surge in trading of agricultural futures contracts?
Most users of commodity markets have strong opinions on the matter, but say there’s far too much background noise to hear the whispered truth that in the end will win out.
“We’re two to three years into a multi-year rally, and a rising tide lifts all boats,” said futures market expert Bruce Love.
“There’s been exponential growth and everything is flowing into commodities. With all that investment and all that money there, it’s going to flow into those markets regardless of whether they’re electronic or open outcry.”
However, Love thinks electronic trading is one of the keys to Winnipeg’s survival and recent success, even if that’s hard to prove because of the general surge in commodity investing.
“Electronic trading really facilitates trade,” said Love, the former economist of the Winnipeg Commodity Exchange.
“It allows Winnipeg to go out and reach potential users who wouldn’t otherwise use Winnipeg.”
WCE vice-president Will Hill said his exchange has seen a big inflow of money from “non-participant” players, which are generally the big commodity index and hedge funds that are allocating portions of their capital to commodities such as canola.
“You can see that in the amount of non-participant volume that we’ve had,” Hill said.
That includes investors such as Jim Rogers, the New York commodity market guru who has established a commodity index fund. He sees moving to electronic trade as a way of improving the efficiency of the market and he sees the support for open outcry trading coming mainly from people with a vested interest, such as the traders and companies that physically occupy the floors of the remaining open outcry exchanges.
However, officials at the open outcry exchanges in Kansas City, Minneapolis and New York insist that people who work with the physical commodities, such as food companies, grain companies and farmers, prefer to deal with live traders who can answer questions about the market sentiment that a computer program cannot.
Regardless, there is no unassailable answer to the question about trading methods and every commodity has its own reason to be surging. As a result, the electronic component is hard to extract.
For example, canola has a more attractive physical market than it has in recent years, when small crops and lackluster markets led to weak trading. Hill said the WCE’s surging canola volumes are being helped by three fundamental factors: biodiesel demand from Europe; good crush markets in North America and overseas and a big canola crop in Canada.
Electronic trading is playing a part in this, Hill is convinced, but that will take a while to prove.
“We’re getting the same kind of up tick that all electronic exchanges have got regardless of the environment, but I think it would be unfair if we said our increase in volume was solely due to electronic trading,” he said.
Perhaps the picture will be clearer when the commodity markets stabilize from the huge inflow of investment dollars they are experiencing and when the present boom in commodity investing subsides. Then, with quieter markets all around, the difference in the trading action at the electronic and non-electronic exchanges will be more apparent.
But if Rogers is right, and the world is only part way into a 15 year boom in commodities, the exchange world may be waiting a long time to discover the truth.
