In a move designed to develop the electronic marketplace for over-the-counter (OTC) energy options, IntercontinentalExchange Inc. (ICE) said last week it plans to acquire the assets of OTC brokerage Chatham Energy Partners LLC for an undisclosed amount. The possibility of cracking the complex code for taking any form of options on-line could remove the last prop keeping the open outcry energy pit trading alive on the New York Mercantile Exchange's (Nymex) trading floor, according to some traders.
Over the last number of years, energy futures trading volumes have begun to migrate from the physical Nymex trading floor to electronic exchanges such as ICE and the Chicago Mercantile Exchange's Globex system, which is through a partnership with Nymex (see NGI, Feb. 12). However, finding a way to successfully move energy options to an electronic format has proved elusive. Whether or not energy options can go purely electronic remains to be seen. One New York-based analyst said a number of firms have been trying to develop a program, but that the going has been more than a little difficult.
"From what I understand, the Chicago Mercantile Exchange has already cornered the market on former Nobel laureates who are attempting to develop software that will handle any and all options strategies and positions, but they have yet to crack the code on what is really needed," the analyst said. "It is just a very big and challenging programming problem to come up with something that is really going to optimize the execution of options trading across all strike prices and all potential spread strategies in a context where the underlying futures and the implied volatility are constantly shifting. That is why it has been human market-makers providing liquidity to that market up until now. You are dealing with orders of magnitude more complex than programming outright trading on the futures."
However, the analyst conceded that the answer is likely out there. "If this deal moves ICE one step closer, I am happy for them, but I am not holding my breath on them rolling out a wonder product in the next three to six months," he said. "While ICE is looking at developing the electronic market for OTC options, the program, if developed, could be easily adapted to regular options. In my opinion, the pits are safe for the time being."
Chatham, which specializes in structuring and facilitating transactions in the OTC markets for energy options, will be operated as a subsidiary of ICE. According to ICE, which operates global commodity and financial products marketplaces, including electronic energy markets and a soft commodity exchange, Chatham's clients include many of the world's largest commercial energy firms, utilities and financial institutions. ICE said Chatham will support the execution of ICE's strategic plans to develop the electronic marketplace for the execution of OTC energy options.
"We are eager to leverage our electronic platform in the vast OTC energy options markets through the acquisition of Chatham," said ICE CEO Jeffrey C. Sprecher. "By bringing experienced options professionals in-house, we can more effectively execute on our strategy to build our electronic options business. Chatham's proven team will join our global OTC sales and marketing efforts as we work to bring the benefits of electronic trading, including speed, efficiency and transparency, to the OTC options markets."
ICE said it expects to complete its acquisition of Chatham during October and expand its electronic OTC options on natural gas during the fourth quarter of 2007.
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