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Nymex Sets Trigger for Floor to Electronic Trading 'Shift'

In a move that was largely anticipated ever since electronic commodity trading began to really take off back in 2000, the New York Mercantile Exchange (Nymex) announced plans last week outlining when and how a commodity contract will make the "shift" from open outcry trading over to full electronic trading.

In a filing with the Securities and Exchange Commission (SEC), Nymex said the shift to electronic trading will occur when the average quarterly electronic trading volume for a Nymex Division product has equaled or exceeded 90% of the contract volume during two consecutive quarters, a test the exchange noted no product has met as of yet.

"Thereafter, revenues that are generated from the electronic trading of such product will begin to accrue under Bylaw Section 311(G) and will be paid to the Class A Members on a quarterly basis consistent with the financial reporting schedule of the exchange's parent, Nymex Holdings Inc.," the exchange said in the SEC filing. It added that the term "shift" is intended "to reflect what is expected to be a permanent reduction in open outcry trading that would justify compensating the Class A Members in perpetuity, even though open outcry trading for a particular Nymex Division product has not been entirely terminated by the exchange."

As an example, Nymex noted that if the average quarterly electronic trading volume for natural gas is 91% of the contract volume for natural gas contracts in each of the fiscal quarters ending March 31, 2009 and June 30, 2009, then payments to Class A Members for the electronic trading revenue from natural gas would accrue beginning July 1, 2009 and would be paid on a quarterly basis thereafter. Such payment obligations would continue in perpetuity regardless of subsequent trading volume percentages."

During 2007, the percentage of natural gas trading done electronically ranged from a low of approximately 65.6% during the first quarter to nearly 79.2% during the third quarter.

After Nymex inked a deal in 2006 to utilize the Chicago Mercantile Exchange's (CME) Globex electronic trading platform for Nymex contracts (see NGI, June 12, 2006; April 10, 2006), traders knew it was only a matter of time before open outcry floor trading went away completely (see NGI, May 28, 2007). In March CME Group Inc. agreed to acquire Nymex Holdings for $9.5 billion (see NGI, March 24).

In February Nymex said that during 2007 it continued to watch the migration from floor trading to electronic trading (see NGI, Feb. 4). Average daily volume for 2007 was 1.485 million contracts, a 25% increase over 2006. Nymex electronic trading volume on CME Globex averaged 649,552 contracts per day, which represented a 234% increase over 2006 electronic trading volume. Nymex floor-traded energy futures and options averaged 260,160 contracts per day in 2007.

During 4Q2007 average daily volume was 1.539 million contracts, a 28% increase over the fourth quarter 2006. Nymex electronic trading volume on CME Globex averaged 703,673 contracts per day and represented a 91% increase over fourth quarter 2006 electronic trading volume. Nymex floor-traded energy futures and options averaged 228,678 contracts per day for 4Q2007 versus 362,259 contracts per day for the same period of 2006.

Nymex said it will continue to monitor relevant volume levels in the various venues available for Nymex Division products. The Exchange will issue updates to Class A Members after the end of each fiscal quarter containing the latest data on electronic versus floor trading percentages. The exchange will also provide prompt notice to Class A Members in the event that the "shift date" has been reached for any applicable Nymex Division product.

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