The futures industry is always striving for change, pushing for innovation, growth, and stability. Over the past year and a half, this concept has taken form in the competition between the CME and ICE over which holds more incentive for traders. The Atlanta-based ICE purchased the NYSE Euronext, while Chicago based CME is making efforts to purchase multiple smaller exchanges such as the DME (Dubai Mercantile Exchange) in order to supplement power.
But how do these exchanges tout global prominence? One of the specifics has come down to liquidity in the markets, specifically, Crude Oil. A year ago this month, the trading volume for Brent oil futures offered by the ICE overtook the WTI crude futures (offered by the CME) on the CME’s New York Mercantile Exchange. The theory is the more volume a contract holds, the more liquidity if offers, the more traders will chose one over the other. The more traders who view Brent as the contract to trade, the more Brent becomes an accurate representation of the global oil market.
Part of this is driven by the market itself – WTI hasn’t been quite as useful an indicator of global oil prices due to a prolonged supply glut in Cushing, OK. The two tracked each other very closely up until late 2010, at which point the consistently lower price of WTI took hold. Here’s what the spread between the two looks like now.
(Disclaimer: Past performance is not necessarily indicative of future results)
There have been two instances in 2013 in which the two contracts have reached similar spot prices, suggesting that WTI may be pushing once again for the representation of the global oil market.
From a Managed Futures perceptive, most managers we work with trade in both the WTI and Brent markets in order to gain more exposure.
P.S. – Despite the CME teaming up with multiple foreign exchanges over the years, Crain’s Chicago points out that the majority of CME’s business is still domestic.
Table Courtesy: Crain’s Chicago