As the IntercontinentalExchange (ICE), the New York Mercantile Exchange Inc. (Nymex) and Canada's Natural Gas Exchange (NGX) continue to compete for energy trading market share, there is the very real possibility that the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT) could throw their respective hats into the ring in the not-so-distant future.
The energy trading landscape is changing as exchanges continue to evolve to stay competitive by best suiting the marketplace and their traders. The latest salvo was fired last week as ICE announced plans to introduce more than 50 additional cleared contracts in its over-the-counter (OTC) energy markets during the first half of 2006, with the first 10 contracts expected to be available for trade beginning March 3 (see related story).
The ICE announcement follows Nymex's bombshell earlier in the month that it has decided to offer side-by-side open outcry and round-the-clock electronic trading of its benchmark, physically settled energy futures contracts (see NGI, Feb. 13). Nymex said it expected to launch side-by-side trading during the second quarter of 2006. The exchange also reported last week that it is moving forward with General Atlantic's investment proposal and hopes to launch a potential initial public offering this year (see NGI, Feb. 13), something that ICE found success with in Nov. 2005 (see NGI, Nov. 21, 2005). ICE's shares, initially priced at $18-20, quickly ratcheted higher and have been trading above $50 lately.
Meanwhile, Nymex announced that its natural gas futures contract set an open interest record last Tuesday of 584,428 contracts, exceeding the previous record of 581,337 contracts set on May 13, 2002.
Muscling in on Nymex's territory earlier in the month, ICE launched its West Texas Intermediate (WTI) Crude futures contract and set an immediate volume record. ICE said the WTI launch represented the strongest first-day trading volume for the launch day of any new contract in the exchange's history. Market participants Feb. 3 traded 38,633 WTI Crude futures contracts on ICE Futures, the regulated futures subsidiary based in London. Open interest at the close of business on Feb. 3 stood at 27,500 contracts.
Just prior to ICE's WTI Crude Futures launch, MBF Clearing Corp., a clearing broker for futures transactions on Nymex, filed an antitrust lawsuit against ICE alleging that it maintains a monopoly in the market for electronically traded Brent Crude Oil Futures contracts, and seeks monopoly power in the markets for electronically traded Henry Hub Natural Gas and Light Sweet Crude Oil contracts. MBF says that during trading on Dec. 7, 2005, ICE terminated MBF and MBF's customers' access to ICE. The complaint alleges that ICE did this to block the development of liquidity for the soon to be launched Nymex Electronic Brent Crude Oil Futures contract, and to limit development of liquidity for Nymex miNY Henry Hub Natural Gas and Light Sweet Crude Oil Futures contracts.
In response to the suit, ICE said last week it intends to "vigorously defend against the claims" and "strongly believes" that it is not in violation of any antitrust laws. "We note that MBF has long maintained a close affiliation with the New York Mercantile Exchange, and that this lawsuit was filed immediately prior to the introduction of ICE Futures' competing WTI futures contract," ICE said. "We will file a formal response to the lawsuit in court within the time provided by law, and we will take all actions that we deem necessary to defend the company against this litigation."
The bad blood between Nymex and ICE has a history. In October 2005, the U.S. District Court for the Southern District of New York granted summary judgment in favor of ICE on all claims asserted by Nymex in a lawsuit related to ICE's use of Nymex settlement prices in its OTC derivative contracts (see NGI, Oct. 10, 2005). In his ruling terminating Nymex's lawsuit, Judge John G. Koeltl found that Nymex's settlement prices were not copyrightable works as a matter of law, and that ICE had not engaged in copyright or trademark infringement in referencing Nymex's publicly available settlement prices in its OTC derivative contracts. Nymex said it planned to appeal the decision.
Carving out its own niche in the energy universe is NGX, which began wholesale commodity exchange operations in February 1994. The exchange has developed the AECO/NGX Intra-Alberta Market Center into one of the most liquid spot and forward energy markets in North America. Wholly owned by TSX Group Inc., operator of the Toronto Stock Exchange, NGX currently averages 400 traders online per day and offers electronic trading and price discovery, central counterparty physical and financial clearing and counterparty risk mitigation for both exchange and OTC transactions. The exchange provides physical spot and forward contracts deliverable in:
"Right now, our business is largely concentrated in Canada," said NGX President Peter Krenkel. "Those western [U.S.] points are relatively new and do not have a lot of liquidity yet at this stage. However, we have some interest from clients, particularly the ones who do business with us at AECO. We are optimistic that business will pick up in the U.S. going forward."
Krenkel said that while NGX's focus still remains on the core Canadian market and the opportunities that are present, growing at home involves markets that are in someway connected to Canada. "We have had interest, primarily from our customer base, asking us to add markets that are connected in someway to the activity here in Canada," he said. "Half of the gas from Canada flows to the United States, so there is a logical physical connection between some of the northern tier U.S. markets and Canada."
In addition to competing with each other, Nymex, ICE and NGX could soon find themselves competing with the CME and the CBOT in the energy arena. CBOT appears to be actively researching a Chicago natural gas futures contract. CBOT contacted NGI last week for Chicago index information and said it was still mulling its options.
As for the CME, the largest U.S. futures exchange, sources say recent comments from the exchange seem to point to its eventual entrance into energy. Any plan by the CME to add energy futures contracts would put the exchange in direct competition with Nymex and ICE.
"We don't comment on any products that we have in development, no matter what they are," said Allan Schoenberg, director of corporate communications for the CME.
Krenkel said it would not be surprising if the CME was looking at energy because the company is very successful, profitable and has a lot of cash. "Energy at the moment looks like a very interesting play and since the CME already lists a number of other derivatives, I am not surprised that they have an interest in this space," he said.
Commercial Brokerage Corp.'s Ed Kennedy said he fully expects that the CME will get into energy futures at some point. "I didn't think they would renew the noncompete in the first place," he added, alluding to the noncompete agreement between the CME and Nymex that expires in June.
As for trading energy futures, the broker said Chicago is a good location. However, speaking from his 36-year history of working with exchanges, Kennedy said there could be a few speed bumps. "We had a contract on COMEX trading gold and we had a contract on the Chicago Board of Trade trading gold, but the industry was geared up to do their business with New York," he said. "It is tough to get a repeat contract off the ground on the futures side. You can do it on the OTC side because the terms of the contract are different.
"I have nothing against the CME entering the energy futures arena. If my clients want to deal with the Chicago contract, that's fine. If it works, I'll use it. However, you have to remember that we have been trading on the Nymex since 1991. All of the basis arrangements have already been established, so I think it is going to be an uphill fight for them. On the positive side, the CME and Chicago Board of Trade really back their new contracts. They really know how to get something out of the gate and running right away. New York still has yet to learn that."
Traders also note that if the CME does get into energy, a Chicago Citygate Hub contract could be in the works. However, that option brings into question liquidity concerns, dredging up a little history of past failed natural gas contracts at other exchanges.
"It might work, but liquidity is the key," said one Northeast source. "We saw that it failed when the KCBT [Kansas City Board of Trade] tried the Waha contract and when the Nymex tried the Alberta and Permian [basin] contracts. They all lacked the liquidity to make it stick" (see NGI, March 8, 1999; Aug. 9, 1999).
"With a Chicago futures contract, you might get some commercial traders coming in and doing some volume, but the question is whether the speculators will join them," he added. "Without the specs, the volume and the liquidity probably won't be there."
One East Coast broker said the CME is certainly a "realistic" competitor. "We will have to see if they go through with it."
As for the rapidly changing energy trading landscape, the East Coast broker warned against blinking. "Things are happening and they are happening faster than you think," he said. "ICE's WTI contract is up and running and it has survived its birth. We will see if it survives its infancy, but at least it did not die on arrival. The next thing up, in my mind, would be a natural gas contract, in terms of moving through the energy suite. If that gets going before Nymex can get going, then I think Nymex is going to be behind the eight ball."
Nymex, ICE, NGX and Commercial Brokerage Corp. all will be participating in GasMart 2006, the 20th annual gathering of natural gas producers, marketers, pipelines and customers, coming up in Denver May 3-5. Go to gasmart.com for further details.
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