* 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 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
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
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
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
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