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Nybot Accuses Nymex of Interfering with ICE Merger

The New York Mercantile Exchange's (Nymex) announcement late Wednesday that it intends to enter the soft agricultural commodity futures markets ruffled more than a few feathers in the trading world, chiefly those of the New York Board of Trade (Nybot), which accused Nymex on Thursday of a "transparent attempt to interfere" with Nybot's $1 billion-plus merger with IntercontinentalExchange (ICE).

On Wednesday (see Daily GPI, Dec. 21), Nymex said it was introducing six new soft commodity futures contracts (Nymex cocoa, Nymex coffee, Nymex cotton, Nymex frozen concentrated orange juice, Nymex sugar #11 and Nymex sugar #14) on the Nymex ClearPort clearing and trading platform. The exchange added that it anticipates listing the contracts on Chicago Mercantile Exchange's Globex electronic platform by the end of January 2007.

The move was widely viewed by people in the industry as a preemptive strike by Nymex in anticipation of the ICE/Nybot union. First announced in September (see Daily GPI, Sept. 18), the merger, which is expected to be completed during the first half of 2007, would bring Nybot, the 100-year-old open outcry exchange for sugar, coffee, cocoa, cotton and other commodities and financial products, together with ICE, an Atlanta-based electronic energy exchange and chief rival to Nymex.

On Thursday, Nybot questioned Nymex's motives and doubted that the listing of "cash-settled clones of the Nybot flagship soft commodity contracts" had much to do with market demand.

"We believe the Nymex action is a transparent attempt to interfere with the merger of Nybot and IntercontinentalExchange (ICE) that was overwhelmingly approved by the Nybot membership last week," said Nybot CEO C. Harry Falk. "In our view, this has little to do with market demand for these contracts, but is an obvious attempt to prevent a change in control under Nybot's valid lease."

Falk pointed out that Nybot's lease contains provisions to prevent products that compete with Nymex from being listed on the Nybot trading floor. "Moreover, while it may be tempting for the dominant electronic trading platform to employ pricing power to stifle competition, we do not believe it will succeed," he said. "We are confident that Nybot's strong reputation for customer relationships, market depth, high-quality floor broker community and license of the ICE trading platform can withstand competition in soft commodities from competitors with no prior experience."

Reaction from the industry was mixed. Some said that with Nymex stepping up the competition, ICE's over the counter (OTC) platform might not be safe.

"They are going right at the ICE/Nybot union in an attempt to take over their business," said Ed Kennedy, a broker with Commercial Brokerage Corp. "There has always been bad blood between Nybot and Nymex. That rivalry goes way back. Nymex's move could be successful."

Calling Nymex's move into soft goods an "ironic twist," Fox-Pitt, Kelton analyst Edward Ditmire said Nymex "is attacking Nybot strongholds" with the lure of electronic trading.

"Timing is highly opportunistic, as the 'electronification' of an open-outcry market can be a delicate affair," Ditmire said in a note to clients. "The timing of Nymex's excursion will pressure ICE to quickly list the Nybot products electronically, which could amplify the disruptive elements of an open-outcry to electronic transition, and make life harder on the floor personnel who control the liquidity in these products."

The analyst noted that splitting the agricultural markets could be difficult because of low volumes. "Markets need a critical mass to function, and even Nybot's largest market, sugar, at 12 million contracts YTD, is only about a tenth of the size of the WTI Crude market that Nymex and ICE now split," he said. "Thus, it is unclear that a small portion of the sugar trade would be sufficient for a robust market."

With Nymex on the offensive, Ditmire warned that competition to ICE's OTC platform could be next. "The competitive tension between these two players is staggering, and while we will be watching developments in soft commodities carefully, the possibility that Nymex could become even more offensive, engaging ICE on more fronts, especially its prize OTC platform, seems more likely now."

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