SURVEY - DERIVATIVES: Exchanges trading on an uncertain future: COMMODITY DERIVATIVES by Adrienne Roberts: What will be the outcome of the rivalry between Nymex and London's IPE? The September 11 attack has added a brutal new twist to the ongoing contest
Financial Times, Sep 25, 2001
By ADRIENNE ROBERTS
After the devastation of New York's central business district, local commodity exchanges are still struggling to recover.
The US trading floor for coffee, cocoa, sugar and orange juice was destroyed when the south tower of the World Trade Center collapsed, damaging the adjacent New York Board of Trade.
The show goes on, however, this time relocated to cramped premises in a backup site in Queens.
The world's largest energy exchange, the New York Mercantile Exchange (Nymex), based in the World Financial Center, was undamaged. But access to the building was made difficult by the surrounding carnage. It was almost a week before Nymex traders were able to return to the floor for abbreviated trading sessions.
The attack completely eclipsed the recent rivalry between Nymex and its largest competitor, the International Petroleum Exchange.
Some traders used to say that Nymex and the IPE each had one big worry. Nymex feared the IPE would develop serious electronic trading capacity and the IPE worried that Nymex would create a rival Brent oil contract.
Both fears came true this year.
First the IPE agreed to a takeover by the InterContinentalExchange (ICE), an internet market for over-the-counter energy and metal derivatives.
For the IPE, this means ICE will develop the systems to take it fully electronic in 12-18 months.
For ICE, it means access to clearing facilities. It recently announced that users would be able to clear ICE's West Texas Intermediate and Henry Hub natural gas swaps through the London Clearing House, alongside their IPE futures business.
Then, in retaliation, Nymex launched a Brent contract this month and made it clear that, in New York at least, the future of open outcry trading would be preserved. Major incentives to trade the new Brent contract led several IPE floor traders to say they planned to relocate to New York.
The terrorist attack abruptly interrupted the contest, at a time when it was important for Nymex to gather momentum.
The US exchange has a limited window of opportunity to build up liquidity in its own Brent contract before the IPE's electronic platform is fully established. Some analysts think the contest will be won or lost even earlier, arguing that Brent must take off in the first few weeks of trade if it is to succeed at all.
In the meantime, digital trading is still a contentious issue among IPE users. Some - not least the independent local traders - prefer open outcry. Others like the idea of a system where new products can be more cheaply and easily introduced.
Where most of them do agree, however, is the advantages of real time risk management, and straight-through-processing which automates paperwork and reduces the risk of costly back-office errors.
Other exchanges, too, are divided on the advantages of electronic trade. London International Financial Futures and Options Exchange (Liffe) commodity contracts went electronic late last year, but the London Metal Exchange is keeping open outcry.
The LME launched a more sophisticated version of its electronic platform this month but Simon Heale, chief executive, has made it clear that open outcry will continue until LME members say otherwise.
As competition between exchanges intensifies, there is pressure on managers to ensure that their market remains the market of choice. "You have to consistently review your contracts to ensure that they continue to be successful. You have to ask yourself: 'is this still what the market wants?'" said an IPE director.
Liffe, for example, is planning on expanding its product range into weather derivatives, and has already started publishing three European weather indices. The exchange is also looking at expanding its portfolio of wheat products and is considering introducing an arabica coffee product to add to its existing robusta futures.
Recent experience shows that some new products can take time to bed down, however. Weather derivatives - strictly speaking closer to an insurance contract than a typical commodity derivative - have a good following in the over-the-counter market, but the Chicago Mercantile Exchange is not yet seeing much call for its standardised weather derivatives, launched in 1999.
Bandwidth futures, offered by anumber of online exchanges, also have yet to reach their full potential. Set up on the assumption that surplus network capacity would become a tradeable commodity, bandwidth exchanges have been hit hard by the decline in telecoms business.
One of this year's latest products, Euronext's Bordeaux wine future, has yet to prove itself.
Even computer memory is becoming commoditised. Enron has plans afoot for an over-the-counter DRAM market. Commodity exchange executives are not quite ready for DRAM futures. For the time being, they say, rapid technological change makes microchips too much of a moving target to form a standardised contract.
Copyright: The Financial Times Limited
_____
URL: news.ft.com
URL (print): globalarchive.ft.com |
