The federation spent two seasons setting up colonies and mining and shit in the gamma quadrant as well as the Ferengi business ventures in the area. I kind of assume the wormhole opens up into the outskirts of Dominion territory because it just works best. They sent that one psychic powered Cotta to tell the feds to fuck off and they didn't.

Edit to fix my quadrant, said Delta instead of gamma cause I'm watching Voyager right now