Trading primary markets
by Allen D. Hanson
Few traders understand the difference between primary futures markets and those that are often called
"secondary" markets. Sometimes it is not easy to tell the difference between them. As a new futures
contract develops it gains status through volume (the number of contracts traded during a session) and
open interest (the number of contracts that haven't been closed). Commercial participation grows and
soon a specific industry is relying on this futures market as a prime source for its cash pricing. During the
transition from a secondary to a primary market, however, there is a period where there is no clear
distinction between the two classifications.
Obvious primary futures markets in the United States include wheat, soybeans, corn, silver and other
heavily traded commodities where dealers rely on futures quotes to price the cash commodity. Obvious
secondary futures markets include the stock indices and other financials where the cash market is actually
the primary market—the futures market follows the cash, but does not actually set the cash price. There
are literally dozens of futures contracts that are halfway in between. They are not influential enough to be
primary markets, but they do influence the trade to some extent as secondary markets.
The Commodity Exchange (COMEX) in New York is regarded by many investors as a primary market in
precious metals. Many gold and silver dealers rely on the COMEX for their inventory pricing and they
base cash transactions on COMEX quotes. The use of a particular futures market by industry executives
to establish price is the key to classification as a true primary market. The United States government,
however, selected the London Gold Fix to price the new U.S. Eagle coin to the dealer trade. Regardless
of the reason, the COMEX became a secondary market in this particular case despite the tremendous
influence COMEX has had worldwide in the pricing of precious metals.