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General Atlantic Investment in Nymex Outlined; Open Outcry Trading to be Protected

In the wake of the New York Mercantile Exchange's (Nymex) announcement that it will sell a 10% stake to General Atlantic for $135 million (see NGI, Sept. 26), questions surfaced about the future of open-outcry trading. The New York Post reported Thursday that exchange members are concerned that Goldman Sachs, which has ties to General Atlantic, would push electronic trading.

Goldman has a huge electronic energy trading operation and investments in several all-electronic stock and futures exchanges. Would it somehow be able to lead the exchange away from its 132-year-old method of trading?

On Thursday, Nymex Chairman Mitchell Steinhause and General Atlantic President William Ford assured members that there would be provisions to support and protect open outcry trading.

"We are particularly interested in working with Nymex to augment its open outcry trading model and to develop opportunities in market data, clearing and complementary electronic trading," said Ford.

"Open outcry, supported by a sound technology capability, is fundamental to Nymex's leading competitive position."

Commenting on the New York Post report Thursday, one natural gas futures broker said he didn't know if a move to more electronic trading on Nymex would be in the exchange's best interest. "With electronic trading, you have to be careful what you wish for," he said. "We currently have something that is near electronic trading called Nymex Access. We've seen overnight electronic Access trading with small volumes pushing the market all over the place. Electronic trading is also slow. It really isn't that fast.

"The problem with executing electronic trades when you have markets moving as fast as natural gas is you only have bid/offers. So when the bids and offers are moving all over the place, it is not that easy," he said. "I know people point to the IntercontinentalExchange as proof that you can trade electronically effectively, but the reason you can do it on ICE is because we have Nymex with the open pit.

"There are limitations on what electronic trading can do. It is not everything," he said. "You can only put limit orders in below or above the market, but you can't use stop orders."

The broker said trade execution can be more challenging with an electronic exchange. Complete electronic trading also might create more price volatility, he said. There are no local traders in a purely electronic market.

"Electronic trading is not perfect, but neither is open pit trading," he said. "People may say someone yelling into the pit could be sloppy and inefficient where as someone pointing and clicking would be more efficient."

Another natural gas broker said the General Atlantic deal is far from a sure thing. He claimed there was an "open revolt" among members and seat holders over how it was handled.

"Some believe this was a low bid and people were trying to increase the deal and get it done. In addition, people were also curious about the bid from former Nymex Chairman Michael Marks, who some believe had a better offer," he said.

Nymex also had other offers to weigh as well. Earlier last week the board of directors of Nymex Holdings sat down to discuss a revised offer from Battery Ventures. The board reiterated its commitment to continue moving ahead with the General Atlantic bid. First reported by Dow Jones on Friday, the latest Battery Ventures bid was for a 5% stake in Nymex for $75 million.

As to whether electronic or pit trading is better, the broker said he believes there are a lot of advantages from a trading perspective to going with electronic trading. "In pit trading, I call down an order to buy 20 at $14, while simultaneously another guy calls down an order for 100 at $14. They both hit the ring at the same time. But do they get done simultaneously or do I get left out? Who's to say how that works in the arcane world of the pit?

"If it's electronic, when my electrons get there, they get there either before or after the next guy, so it's just like trading in the Access session. If I am the best offer, mine all get worked off before the next electrons come in, even if they are at the same price. That makes it a lot easier on the trading and I think that is the reason why eventually the pit trading will cease."

On the other hand, the broker said, "There will always be the need for services with people giving advice on when to push the button electronically, but I believe the momentum between open outcry versus the electronic method is firmly on the electronic trading side."

General Atlantic Bid Detailed; IPO for Nymex Discussed

Steinhause and Ford also outlined the General Atlantic bid on Thursday to members and shareholders of Nymex Holdings Inc.

The companies touched on potential initial public offering (IPO) plans for Nymex in the future. Ford said he and the board of directors agree on the "distinct opportunities" the exchange has to enhance its value prior to and after a potential IPO, noting that General Atlantic is prepared to commit its professional resources to work with the exchange to accelerate its growth.

"Having helped more than 30 companies execute IPOs, we have the resources to assist Nymex in preparing and executing a first-class IPO," Ford said. "And after an IPO, we expect to work closely with the Nymex board and management team to increase Nymex's value by evaluating and helping to execute strategic opportunities."

The General Atlantic investment values Nymex at $1.35 billion. If the agreement is approved, terms include:

The proceeds from General Atlantic's investment, net of transaction expenses, will be distributed to Nymex shareholders in the form of an extraordinary cash distribution of $160,000 per share. This distribution, in which General Atlantic will not participate, follows the special cash dividend of $100,000 per share paid to Nymex shareholders in August.

The companies said there is no break-up fee associated with the transaction, and if the deal is approved, General Atlantic will hold minimal consent rights over certain matters and be subject to standstill provisions. There are also financial incentives for Nymex and General Atlantic to work together toward completing an initial public offering of Nymex stock in the future.

Consummation of the transaction will require successful negotiation and execution of definitive documentation as well as the approval of Nymex shareholders and the Commodity Futures Trading Commission (CFTC). The definitive agreement between Nymex and General Atlantic will be filed with the Securities and Exchange Commission and mailed, along with other proxy materials, to all Nymex shareholders.

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