V.6:1 (40-41): Trading primary markets by Allen D. Hanson

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.