UPDATE 2-CME takes on U.S. rival with smaller silver contract

Thu Apr 18, 2013 6:38pm EDT

* Smaller silver futures contract to start trading in June

* CME contract to compete with NYSE Liffe's 1,000-oz silver

* Move follows sharp drop in trading volumes, competition

By Frank Tang

NEW YORK, April 18 (Reuters) - CME Group Inc said on Thursday it will launch a smaller 1,000-ounce physical silver futures contract that will compete with rivals in attracting more retail demand and hopefully boost flagging trading volumes in the metal.

CME's new product will go head-to-head with NYSE Liffe's 1,000-ounce mini silver futures contract. Mom-and-pop investors like trading in smaller increments than the CME's main 5,000-ounce contract, which is a global benchmark.

With the smaller lot size, the Chicago-based exchange is responding to customer demand, said Robert Ray, CME managing director for Europe, Middle East and Africa.

"When you look at some of the retail or small CTAs (commodity trading advisors), the size makes it extremely attractive. That's the size that they can better manage price discovery or risk management," he said in a phone interview.

The move also comes as competition from exchange-traded products has intensified and after a big drop in trading volumes on the flagship 5,000-ounce silver contract, which sets the global price benchmark for silver trade.

This is CME's second foray into this niche market.

It briefly owned the contract now with NYSE Liffe after it took over the Chicago Board of Trade (CBOT) in 2007. It was forced to sell it and some other precious metals products to the New York-based exchange a year later due to anti-trust concerns.

CME's other silver product is a 2,500-ounce financially settled MiNY silver contract, but that has not attracted significant interest. Some market participants say the lot size is still too big to entice retail investors, while others cited a lack of physical delivery as a turn-off.

CME also may struggle to lure liquidity from the established NYSE Liffe contract, which was launched 11 years ago.

"They (CME) have to make sure that they are providing the liquidity the traders need," said Phillip Streible, senior commodities broker at R.J. O'Brien, who trades the NYSE Liffe silver product.

Average daily volume of the NYSE Liffe 1,000-ounce silver contract has been around 3,000 lots so far this year. That is much lower than the more than 50,000 contracts in CME's 5,000-ounce contract over the same period.

Based on Thursday's prices, one lot of the new 1,000-ounce contract would cost around $23,000, while the 5,000-ounce benchmark is valued at $116,000, only 20 percent less than the $139,000 cost of one 100-ounce benchmark gold contract.

At one-fifth the size of the 5,000-ounce contract, participants who accumulate five warehouse depository receipts of the smaller contract can convert them into one 5,000-ounce contract, CME said in a statement.

The new contract will begin trading in June with the September 2013 contract month on the exchange's Globex electronic platform, on its over-the-counter clearing system known as ClearPort and in open outcry on its New York trading floor.

FUTURES VOLUME DECLINE

Traders say CME has been looking for ways to boost silver trading volumes, which have fallen since the market's roiling in 2011 when prices soared to record highs near $50 an ounce in late April, only to lose more than 30 percent in the next 10 days.

That triggered the so-called commodities "flash crash" and forced many hedge funds and institutional investors to exit silver futures completely.

Historically silver has attracted interest from short-term speculators who like its use as both an industrial metal and a safe-haven play.

But total trading volume in Comex silver fell more than 30 percent year-over-year last year, Reuters data showed, after a record turnover in 2011. In the first three months of this year, turnover was down 8 percent from a year earlier.

The CME's silver contract has also faced stiff competition from silver exchange-traded products, which have become popular with retail investors who see them as an easy way to gain exposure to precious metals.

Holdings in major silver ETPs monitored by Reuters totaled 538 million ounces on Wednesday, near its all-time high of 548 million set last month.

But news of the exchange's effort to woo back retail interest comes at a fragile time for commodities as investors seek better returns in equities and other financial markets.

A historic collapse in gold prices that started last Friday led to a rout across precious and base metals and oil and has shaken investor confidence in the complex.

Spot silver prices were around $23.30 an ounce on Thursday, near a 2-1/2 year low hit on Tuesday and down more than a fifth from a week ago. That is less than half the all-time highs.

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.