Filed 8 March 2012, 11:45 IST. Every price, volume and forecast below is reproduced as published on that date and is not a current quotation. For how the benchmarks themselves are set, see how gold is priced.
The Tokyo Commodity Exchange looked to a tie-up with CME Group to revive turnover in its gold and platinum contracts. The arrangement was intended to place Japanese contracts in front of international order flow by making them accessible through infrastructure traders already used, rather than by changing the contracts themselves.
The underlying problem was liquidity, and liquidity is self-reinforcing in both directions. A contract with deep order books attracts participants because they can enter and exit at a known cost; a contract whose books have thinned loses participants for the same reason, and the process does not reverse on its own. By this point Tokyo's precious-metals contracts had been losing share for years to venues with more international access.
What a venue tie-up actually changes
Very little about the instrument, and potentially a great deal about who can reach it. A link of this kind typically means the contracts are listed on or routed through the larger venue's electronic platform, so a firm already connected there can trade them without a new membership, a new clearing relationship or a new connection. The contract specification, the currency and the delivery terms stay as they were.
That is why it is a distribution decision rather than a market-structure one. It does not make a one-kilogram yen-per-gram contract into a hundred-ounce dollar-per-ounce one, and a Tokyo quote remains a different number from a New York quote for reasons set out in contract specifications. What it changes is the cost of reaching the order book.
Tokyo's particular position
TOCOM's precious-metals contracts had two structural features that mattered here. They were yen-denominated and quoted per gram, which suited a domestic retail and industrial participant base and made them awkward for international traders who priced everything in dollars per ounce. And Japan had a genuine physical market behind them, from a large jewellery and industrial demand base to a retail investment culture with its own gold accumulation plans, so the contracts were not merely financial.
Platinum is the sharper case. Tokyo was historically the most important platinum futures venue in the world, reflecting Japanese autocatalyst and jewellery demand, and platinum's supply concentration in South Africa gave that contract a real hedging constituency. Losing liquidity in a contract with genuine industrial users is a more serious problem than losing it in a purely speculative one; the supply-side story behind it is in the PGM section.
The record
The headline's styling of the exchange name, "Tocom" rather than the capitalised form, is the desk's own and is preserved. What the entry records is an exchange seeking order flow through a partner rather than through its own screens, which is the shape most venue tie-ups of the period took.
Questions about this dispatch
What was the TOCOM–CME arrangement meant to achieve?
Distribution. By making Tokyo's gold and platinum contracts reachable through infrastructure that international firms were already connected to, the exchange hoped to attract order flow without altering the contracts. The specification, currency and delivery terms would stay the same; only the cost of reaching the order book would change.
Why did Tokyo's contracts lose liquidity in the first place?
Liquidity is self-reinforcing in both directions. Deep books attract participants because entry and exit are cheap; thinning books repel them for the same reason, and the process does not reverse spontaneously. Tokyo's contracts were also yen-denominated and quoted per gram, which suited domestic users and made them awkward for international traders pricing in dollars per ounce.
Why was the platinum contract the more important one?
Because Tokyo was historically the world's leading platinum futures venue, on the back of Japanese autocatalyst and jewellery demand, and because platinum's supply is concentrated in South Africa in a way that gives industrial users a real need to hedge. Losing liquidity in a contract with genuine hedgers is more damaging than losing it in a purely speculative one.
This page restores an item first published on 8 March 2012, 11:45 IST at the address below. Cite the publication date rather than the date you read it: the material is a 2011 to 2016 document, and the date is what makes it meaningful.
https://www.bullionstreet.com/news/tocom-hopes-cme-tieup-to-boost-gold-trade/1290