The New York Mercantile Exchange (Nymex) solved the dilemma of how to take its electronic energy trading to a round-the-clock schedule. Nymex Holdings Inc. reported late last week that it has entered into a technology services agreement with the Chicago Mercantile Exchange (CME), under which the CME will become the exclusive electronic trading services provider for Nymex's energy futures and options contracts.
Under the deal with the CME, which is the world's largest and most diverse financial exchange, access to electronic trading of Nymex products will be available "virtually 24 hours a day" on the CME Globex electronic trading platform. Some market participants speculate that Nymex's move to 24-hour electronic trading could mark the beginning of the end for open outcry pit trading, which the company vowed to protect last month. In March, General Atlantic's investment agreement in Nymex contained provisions to support and protect open outcry trading, including a requirement for the continued financial support for technology, marketing and research for open outcry (see NGI, March 20).
The move was likely in response to the success of the IntercontinentalExchange's (ICE) electronic trading activity. Nymex's board of directors voted in early February to offer side-by-side open outcry and electronic trading of its benchmark, physically settled energy futures contracts (see NGI, Feb. 13).
The competition for energy trading market share has been heating up over the last year. Comments made by the CME earlier this year seemed to point to the exchange's possible entry into energy. Nymex and the CME had a noncompete agreement that was set to expire in June (see NGI, Feb. 20).
"Outsourcing the electronic trading of our energy futures contracts to CME will ensure that we continue to meet the needs of our customers while providing additional liquidity to our open outcry trading platform," said Mitchell Steinhause, chairman of Nymex. "We have had a successful relationship with CME over the years, and we are pleased that we will be able to continue to work together to provide the most efficient and accessible energy futures exchange in the world."
Initial trading of Nymex energy products on CME Globex, currently scheduled to begin in the second quarter of 2006, is expected to include side-by-side trading of Nymex standard-sized and Nymex miNY energy futures contracts for crude oil, natural gas, heating oil and gasoline with Nymex's floor-based products during open outcry trading hours and when the Nymex trading floor is closed.
Nymex said all of its products trading on Access, the exchange's after hours electronic trading platform, are expected to transition to CME Globex during the third quarter of 2006. Also under the terms of the agreement, CME Globex will be the exclusive electronic trading platform for metals products currently listed on the COMEX Division, with an anticipated third quarter launch.
Nymex said that all of its contracts traded on CME Globex will be cleared by the Nymex clearinghouse. In addition to Nymex liquidity providers, a specified number of CME market makers will be designated by CME to build electronic liquidity at Nymex member rates.
"Our longstanding relationship with our colleagues at Nymex and our previous experience in listing their contracts on our platform create a strong foundation for this agreement, which will greatly benefit market participants seeking access to the most liquid energy derivatives in the marketplace," said CME Chairman Terry Duffy. "By increasing global distribution of Nymex products via CME Globex, the world's leading derivatives trading platform, we will deliver added value to our customers and shareholders."
From June 2002 through November 2005, Nymex miNY crude oil and natural gas futures contracts were available on CME Globex as part of a previous service agreement between the two exchanges. Floor trading of Nymex's energy contracts has increased 28.3% since 2003. Electronic trading on Nymex ClearPort and Nymex Access averaged 330,280 contracts per day during the first quarter of 2006, an increase of 128% over the same period in 2005.
"This agreement establishes the most robust and liquid energy trading model in the world," said Nymex CEO James E. Newsome. "Listing our energy contracts on the CME Globex platform enables us to dramatically increase our distribution much more quickly than we could have by building our own capability. This agreement will complement and enhance our open outcry trading, expand the accessibility of our benchmark energy contracts to investors worldwide and allow us to build on the record electronic trading volumes we have been experiencing."
CME CEO Craig Donohue added, "Providing third-party technology services is a key element of CME's long-term growth strategy. This service agreement will leverage CME's proven electronic trading platform and global distribution network to expand access to Nymex, the largest and most liquid energy market in the world. The addition of energy contracts on CME Globex further diversifies our product offerings, creating the first electronic platform offering global access to every major asset class - interest rate, stock index, foreign exchange, agricultural and now energy."
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