Nymex pits itself against electronic rivals
By Jeremy Grant
Published: February 16 2006 16:10 | Last updated: February 16 2006 16:10
A question flashes across the home page of the New York Mercantile Exchange’s website: “Evolution is inevitable. How will you respond?”
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The world’s largest energy and metal futures exchange, rooted for 134 years in the traditions of open outcry pit trading, answered its own question this month with a decision to introduce electronic trading side by side with its pit offering.
James Newsome, Nymex president, says the exchange was surprised at the reaction to its announcement, pointing out that on an average day, about 30 per cent of the exchange’s transactions are carried out electronically.
“It’s been as high as 40 per cent. It appeared to be a quick decision [to allow side-by-side trading]. But it was actually not,” says Mr Newsome, a former chairman of the Commodity Futures Trading Commission (CFTC), in an interview.
He says the decision to allow side by side trading in the second quarter was the culmination of a year of “preparation for the decision to utilise more electronic trading”.
That included a proposed $15m investment in technology upgrades for 2006 – more than the previous year – and changes to the structure of the Nymex board to allow speedier decision making. Industry observers have nonetheless concluded that, as so often in the US futures industry, the threat of all-electronic competition was the decisive factor in forcing Nymex to embrace the world of computer algorithms, laptops and anonymous cyber-trading more fully.
It was not until Eurex, the European derivatives exchange, said it would launch an electronically-driven challenge to the Chicago Board of Trade (CBOT) in 2002 that the US operator, long reliant on face-to-face trading in its flagship Treasury bond futures, introduced more electronic trading.
Nymex’s decision came only weeks after Intercontinental Exchange (ICE) launched an electronically-traded West Texas Intermediate (WTI) crude oil futures contract in competition with Nymex’s WTI contract.
Mr Newsome says: “Competition is a motivating factor to make change. So even though we were already headed in that direction we understood the market was moving in that direction.”
He concedes that it was easier to move after the ICE announcement and after the Chicago Mercantile Exchange (CME), which has made no secret of its ambitions in energy futures, said it was finalising a strategy to get into energy futures.
“We have been operating under the assumption that we would face competition from another exchange, whether it was the CME, or CBOT or Eurex, whoever,” he says. Yet the move still appears odd given that Nymex made a virtue out of offering open outcry when it launched an open outcry-traded Brent crude futures contract in London last September. The effort soon fizzled out, beaten back by ICE’s existing dominant electronic Brent offering.
Mr Newsome says: “We stated since the beginning that we were going to listen to our customers and try to provide the kind of trading that they want. In London they told us they wanted open outcry and at the end of the day they didn’t use it.
“So we’re not going to continue to beat our head against the wall in trying to provide something that customers have obviously decided they don’t want to use,” he says. London is again a focus of competitive and regulatory scrutiny for Nymex. ICE, based in Atlanta, this month launched its WTI in London, where futures trading is regulated by the Financial Services Authority.
The move has raised concern among some lawmakers in the US, who oppose the trading of a futures contract based on an economically significant benchmark US commodity such as the WTI in a foreign jurisdiction.
Nymex has indicated that it might be forced to move its electronically-traded WTI to London so that it can compete on a level playing field with ICE.
Asked whether that was likely, Mr Newsome says: “We’re serious about having to evaluate that decision. A lot of it depends on what the CFTC [US futures regulator] ultimately decides with regard to their comfort with ICE doing what they’re doing.”
While Nymex awaits that decision, it is preparing for a shareholder vote on March 13 on a proposed $160m investment by private equity firm General Atlantic. The amount represents a 10 per cent stake, but is contingent on Nymex carrying out an initial public offering this year. Mr Newsome believes that the General Atlantic vote will be “92 or 93 per cent in the affirmative”.
Is the IPO, on which Nymex is being advised by JPMorgan, on track? “Absolutely,” he says. “We’ve been working parallel paths on an IPO and the private equity deal. One of the primary reasons we wanted a private equity partner was to assist us with the IPO. We’re moving forward very quickly with that for [completion in] the third quarter or beginning of the fourth.” |
