When the New York Mercantile Exchange (Nymex) announced it would begin trading its energy contracts around the clock electronically, some industry veterans expected the new format to perform well, but few expected it to become more popular than the 134-year-old exchange's method of open outcry trading in the pits. However, that has been the case as of late in Nymex's crude oil futures contracts, while volume share in Nymex's natural gas futures contracts still show mixed results.
Through its agreement with the Chicago Mercantile Exchange (CME), electronic trading of Nymex contracts on CME's Globex electronic trading platform has taken off, especially in crude oil, according to Nymex data. On Monday, Nymex crude trading on Globex accounted for 57.5% of Nymex's total crude volume. Even more surprising was last Thursday when Globex's traded share of Nymex's crude volume was 61.9%, which represents the largest Globex-traded share of crude since the electronic exchange began trading Nymex contracts around the clock on Sept. 5. On that record day last Thursday, 179,054 crude contracts changed hands via Globex, while total crude volume for the day was 289,282 contracts.
As for natural gas futures, Nymex volume dominance is still a mixed bag between open outcry pit trading and Globex. Natural gas futures trading of Nymex contracts through Globex accounted for 46.4% and 37.9% of total natural gas futures volume last Thursday and Friday, respectively. However, on Monday, Globex's share of total Nymex natural gas futures contract volumes accounted for 61.1%, with Globex volume representing 36,575 contracts of a total 59,875 Nymex contracts changing hands on the day.
A Nymex spokeswoman declined comment Tuesday due to the fact that Nymex is still in the midst of a "quiet period" as a result of the company's filing of an initial public offering this past summer (see Daily GPI, July 18).
"What is happening here is that some folks in the marketplace like the 'point and click' method of executing an order as opposed to giving it to a broker on the floor," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "In a slower moving market, the electronic exchange may accumulate more volume, but when we get the big bursts of price movement the floor will likely show more volume. You have to remember if you are placing orders you have to execute, but if you want to cancel and replace orders that takes an extra step. It is quicker to do that on the phone than to do it on the mouse."
Saal pointed out that there are drawbacks to running two simultaneous trading operations. "One of the casualties of the diversification of order execution is market fragmentation," he added. "Basically, the liquidity is fragmented between the floor and electronic trading, so even though it all goes into the same pot, both are now less liquid than they would be otherwise. Less liquidity in a market equals greater volatility, especially in these daily trading ranges."
As for whether the expansion of electronic trading through Globex and chief competitor IntercontinentalExchange (ICE) could mark the swan song for open outcry pit trading, Saal said he wouldn't make that bet just yet. "In my opinion, the advantage in a fast moving market is open outcry trading," he said. "Since the natural gas market doesn't slow down, I think there will still be a need for open outcry."
Nymex's partnership with CME was likely in response to the significant success of ICE's electronic trading activity. In February, Nymex's board of directors voted to offer side-by-side open outcry and electronic trading of its benchmark, physically settled energy futures contracts (see Daily GPI, Feb. 9). In April, Nymex solved the dilemma of how to take its electronic energy trading to "virtually 24 hours a day" through a technology services agreement with CME, under which CME's Globex electronic trading platform became the exclusive electronic trading services provider for Nymex's energy futures and options contracts (see Daily GPI, April 7).
Nymex launched its physically settled futures contracts for trading on CME Globex during regular open outcry trading hours on Sept. 5, following its initial offering of financially settled, standard-sized and Nymex miNY energy futures contracts for trading on CME Globex on June 12 (see Daily GPI, June 12).
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