Confirming that the transition from physical pit trading to electronic marketplaces is indeed impacting the way traders and exchanges do business, a Reuters article said Friday that Nymex Holdings, parent company of the New York Mercantile Exchange (Nymex), has plans to consolidate its energy and metals trading floors in an effort to cut costs. The question remains as to whether floor trading will ultimately go the way of the Dodo bird.

According to news reports, Nymex CEO Jim Newsome told exchange executives Friday at the Exchange Forum in London that Nymex is getting to the point where it can combine operations to make the trading floor in New York more efficient, adding that the consolidation would provide "substantial" cost savings.

No timetable was set for the consolidation, but as to hand signals across the room versus electronic ones worldwide, Newsome reportedly said that options trading is still largely dependent on pit trading.

Calls to Nymex for comment were unreturned as of press time.

"The information is certainly credible, especially when you look at the floor volume numbers that are being done," said Tim Evans, an analyst with Citigroup in New York. "Approximately 80% of the energy volume is now being traded electronically. If you've ever been to the exchange you know what a big barn of a place it is, so I am not surprised that Nymex might be looking at moving the metals trading to the same trading floor as the energy, or they are just looking to pare down on the real estate and find somebody to lease some of the unused space. That makes some sense. Some of the numbers are pretty surprising. Heating oil often trades less than 20,000 contracts on the Nymex floor."

According to Evans' data, 83% of the 712,162 contracts traded through Nymex on Thursday were traded electronically on Globex. Of the 116,496 natural gas futures contracts, 91,213 contracts were traded via Globex (78%) while 25,283 contracts were traded on the floor. Of the 436,691 crude contracts traded through Nymex on Thursday, 363,052 contracts were traded on Globex (83%).

As for options, Evans pointed out that none of the exchanges have been able to come up with the software necessary to handle the more sophisticated options trading strategies. "It is sort of the 80-20 rule. With 80% of options action still happening on the floor, Nymex is going to have to maintain a trading floor." He noted that the recent trouble Optionable -- which specializes in options trading -- is having related to the Bank of Montreal losses is probably a reason options dealing will remain on the floor a little bit longer (see Daily GPI, May 15; May 21). "You know what they say, once burnt, 20 times shy."

Looking at the future of Nymex floor trading, Evans said he expects it to stick around in some form as long as it remains profitable. "There are a couple of different ways to look at whether the floor trading business is viable. One is in terms of market share. If it gets down to the point where only 10% of the volume is moving on the floor, then no one is going to miss it disappearing," he said. "However, if you look at an absolute number of contracts, Nymex still occasionally pushes more than 100,000 crude oil contracts across the pit during a day. The exchange is still doing 25,000-30,000 contracts of natural gas on some days as well. There have been plenty of contracts over the history of these exchanges that have had far lighter volume than those numbers. As long as crude oil and natural gas are trading more than 30,000 and 15,000 contracts on the floor, respectively, the floor can still pay its own way."

Evans noted that Nymex has not been one to give up volume, no matter how small of an amount. "For example, we are not closing early ahead of holiday weekends; the overall holiday schedule has been cut; the floor trading hours were extended in February, and the exchange has floated a number of new contracts since it went public," he said. "It is all Nymex beating the bushes and shaking the trees for additional trade volume, so even as the trading numbers on the floor decline, the perception of losing even a small piece of total volume will likely be enough to keep Nymex from pulling the plug. Also, if Nymex has to maintain a floor because of the options hurdle, then what is the harm in having an extra little pit with a few local floor traders for futures."

©Copyright 2007 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.