Nymex Plans Global Electronic Exchange, For-Profit Status
The New York Mercantile Exchange took two giant steps forward last week,
announcing plans to become a for-profit organization and to launch a global
electronic exchange for over-the-counter forward trading and clearing of
a wide range of standardized physical commodity contracts.
The exchange plans to launch the first phase of the e-commerce exchange
in October. It will use its existing clearing infrastructure to introduce
complete counter-party risk management for OTC trading, and will create
net margining with futures markets by calculating a consolidated clearing
The new eNYMEX venture will provide a single, Internet-based interface
to both the OTC markets and the futures market by routing futures orders
to the trading floor and the Nymex ACCESS electronic trading system, depending
on the session.
The range of OTC products offered initially would focus on swap contracts
in crude oil, petroleum products, natural gas, and electricity, with some
spot cash market products also offered, Nymex said. Over time, this would
be expanded to include precious and base metals, coal, and, potentially,
bandwidth, weather and emissions. Although the initial geographic focus
will be on North America, contracts also may be offered for some European
and Asian locations.
"The global energy and metals community has expressed a strong
need for an electronic OTC platform that provides an open, independent,
and neutral marketplace for trading by all participants, price transparency,
counter-party credit risk management, and the liquidity created by simple
standardized contracts," said Nymex Chairman Daniel Rappaport.
Nymex plans to launch OTC trading first, followed by Internet-based
order routing for futures trading. It also is actively looking for joint
venture partners. "We're sifting through the many offers we have on
the table right now," said a Nymex spokeswoman.
There have been numerous announcements over just the last few months
of energy companies and others launching or taking equity positions in
new energy e-commerce sites. According to a report issued by Global Change
Associates in April at least 30 electronic trading platforms have been
announced since December.
The following are just a few of the recent announcements about energy
- In March, seven U.S. and European financial institutions and diversified
energy and natural resource firms said they would launch IntercontinentalExchange.
The partners are BP Amoco, Deutsche Bank, Goldman Sachs, Morgan Stanley
Dean Witter, Royal Dutch/Shell Group, Societe Generale, and the Totalfina
Elf Group. Based in Atlanta, the venture intends to begin trading in a
variety of petroleum and precious metals-based OTC products later this
year with plans to later develop additional markets for other commodity
products, including global natural gas, electrical power and a variety
of base metals. IntercontinentalExchange officials would not say when electricity
or gas trading might begin (see NGI, March 27).
- In April, Southern Company was one of 15 US electric and gas companies
banding together to launch an Internet marketplace for the energy industry
and its suppliers. Other partners include American Electric Power, Cinergy,
Consolidated Edison Inc., Duke Energy, Edison International, Entergy, FirstEnergy
Corp., FPL Group, PG&E Corp., Public Service Enterprise Group, Reliant
Energy, Sempra Energy, TXU and Unicom (see NGI, April
- Late last month, Dynegy and Williams teamed up to invest $25 million
each for a minority equity stake in eSpeed Inc., an interactive electronic
marketplace engine for business-to-business (B2B) e-commerce (see NGI,
- In March, Williams Energy Marketing and Trading made an investment
in trading site HoustonStreet.com, which was launched in July 1999. Equiva,
the joint crude oil trading arm of Saudi Aramco, Shell Oil and Texaco,
invested $6 million in HoustonStreet earlier this year. The exchange has
attracted a large number of power companies. Although it would not release
the daily volumes traded on its physical trading platform, called PowerPit,
or the number of transactions that take place, CEO Frank Getman said there
are 125 companies registered to use the web site with close to 500 traders
(see NGI, March 13).
- Altra Energy Technologies Inc. made a strategic alliance with three
major market makers --- American Electric Power (AEP), BP Amoco and Koch
Industries --- to increase liquidity and strengthen its position as an
independent online energy trading exchange. Altra's electronic trading
system for natural gas, liquids and power has grown from 17 employees in
1995 to 300 today with 1,800 daily traders. The company did $1.65 billion
in 11,000 transactions during February.
- RedMeteor.com announced a global, Internet-based, open trading platform
for crude oil, gas, gas liquids and electricity. Backed by $15 million
in venture capital from Mayfield Fund and Fremont Ventures, the new website
will allow, beginning this spring, instantaneous multiple energy trades
worldwide (see NGI, April 3).
- Coral Energy's e-business web site, Coralconnect.com, is expanding
to include the buying and selling of certain gas contracts. Site users
now can make term gas deals with Coral, whereas before they could only
alter existing contracts. Besides the term deals, Coralconnect.com now
offers Nymex and basis transactions (see NGI, April 3).
- EnronOnline, which started operations Nov. 29, 1999 with gas trading,
is reporting a notional value for current trading of $600 million a day.
The company recently added bandwidth capacity to its list of trading commodities,
which includes power, natural gas, coal, weather products, petrochemicals,
pulp and paper, and emissions credits in the Americas, Europe and Asia.
- PowerSpring announced plans for eMarketplace, which would combine an
online exchange, aggregated customer demand and a portal with energy-related
information (see NGI, April 3).
The big questions for Nymex are: how will its new system fare against
the heavy competition that's already out there, and why should the industry
put its faith and its money into another new e-commerce site when Nymex's
last electronic trading venture failed.
According to exchange Executive Vice President Neal Wolkoff, there are
many factors that will separate eNYMEX from the crowd. "Nymex can
tie together an existing liquid market and an existing customer base, use
our experience, use the people and the intellectual capital that we've
developed over the years in this area and bring the benefits of that into
e-commerce on the OTC side," he said. "There are economic benefits,
there's clearing, there's bookkeeping, there's non-clearing risk management
and there's a level of market knowledge and market management that we would
anticipate bringing, and that others frankly don't have."
Wolkoff predicts that it won't take long for the many energy e-commerce
sites to consolidate. "It's unfortunate to be talking about consolidation
prelaunch of so many systems, but it seems inevitable and not just in energy
[e-commerce]," he added. "The same things are happening in so
many other industries. There's just not going to be room for 15 sites.
My guess would be over the next two years, perhaps three," consolidation
will begin in earnest.
Many observers might question Nymex's chances given the launch and subsequent
shelving of its previous energy electronic trading system, Channel 4. But
Wolkoff noted e-commerce has come a long way in the last few years. "Channel
4 predated a lot of the interest that companies were having in the use
of electronic systems to get efficiencies, transparencies and cost reductions
on their transactions," he said. "I also want to say that Channel
4 --- although we had some fairly clever credit protections --- didn't
offer the full range of risk management tools that we are planning to have
as part of this [eNYMEX product]."
The new system will be more comprehensive, he said. It will tie the
business done on the new e-commerce system with the business done on the
regulated futures and options markets. "Companies that have a portfolio
of gas positions, some on Nymex and some on the e-commerce platform, to
the extent they are offsetting, we would take into account the entire risk
in determining the margin requirements on the regulated positions,"
said Wolkoff. "So there are cost savings that we're talking about
here that weren't possible because of the regulatory world when the Channel
4 system was done.
"And we also try to learn," he added. "We have launched
Nymex Access for example, which does trade. It's been an electronic trading
system online for seven years. It doesn't do the kind of volumes we do
during the day but it does significant volumes. It's been a productive
Regarding the potential for margins for OTC trading on the new system,
Wolkoff said Nymex is not interested in changing the cost structure of
the OTC market. It would "rather allow some of the benefits from having
OTC positions [to carry over into] the futures market. We'll come up with
whatever the appropriate mechanisms, risk protections there are. We're
certainly very mindful about keeping costs as low as possible. I'm looking
at this more as a means of providing benefits because we have the half
of the equation that nobody else does, namely futures and options,"
The exchange board has retained the services of Andersen Consulting,
L.L.P., to work further on the venture. eNYMEX is expected to be a wholly
owned, for-profit subsidiary of the New York Mercantile Exchange.
For-Profit Vote Scheduled for June
The subject of the other major announcement by Nymex last week was its
plan to hold a membership vote June 20 on a "demutualization"
plan, which would convert the exchange from a not-for-profit membership
structure to a for-profit organization under Delaware law, pending approval
of the Securities and Exchange Commission, the Commodity Futures Trading
Commission and the Internal Revenue Service. Each Nymex Division membership
would be converted into one share of common stock in a new holding company
for the entire organization.
"Restructuring the exchange into a for-profit entity will provide
us with the opportunity to create new business ventures, react rapidly
and decisively in an increasingly competitive marketplace, and explore
interest by outside investors" said Rappaport.
Wolkoff also said there actually is a "very close tie" between
launching the new e-commerce site and becoming a for-profit entity. "The
members of the exchange right now typically earn their livelihood through
trading and brokerage opportunities. The fact that there has been a wonderful
equity appreciation in the exchange is a very big benefit, but it's not
the way in which people receive the benefits of membership. When you enter
into these alternative businesses, which do leverage your existing business
knowledge, your existing business assets, it's not so much that the members
or the owners of the institution will be receiving trading and brokerage
benefits, but we want them to be able to receive the benefits of the exchange
through transaction revenue and other normal for-profit activities. The
exchange will enter into for-profit mode and will be able to have its equity
realized through appreciation from these successful business ventures."
In addition to Nymex, several other exchanges in Chicago and New York
are for the first time attempting to become for-profit entities. The reasons,
according to Wolkoff, are technological and regulatory changes and new
business opportunities. "I think the technology has made it such that
customers are looking to the exchange model in getting different parts
of their business functions made transparent and made competitive. And
the exchanges are really in a very good position given their expertise
and their history to be able to fulfill a lot of these needs.
"I think the fact that the regulators have been more willing to
allow the exchanges to offer a more complete slate of instruments for customers,
both that are traditional regulated instruments plus nontraditional, nonregulated
instruments also is helping to drive this," he added. "And I
think that the exchanges, with the whole advent of technology and Internet
businesses, realize that given their assets they have business opportunities
"We look on it as an expansion of our business with nothing negative
or bad about it. This is definitely a plus for the customer community."