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NYMEX Pondering Future of Western Contracts

NYMEX Pondering Future of Western Contracts

Electronic trading may be the antidote to anemic trading of the New York Mercantile Exchange's Alberta and Permian Basin gas futures contracts, Exchange President R. Patrick Thompson said last week.

"Once a major contract in a commodity [NYMEX's Henry Hub gas futures contract, for instance] has developed strong liquidity, it's been difficult to take contracts that are really meant to price off that and develop good enough liquidity to where we really serve our price discovery function," Thompson told attendees at a Texas Independent Producers and Royalty Owners luncheon in Houston.

"We also have difficulty because in the end brokers on the trading floor get paid on a transaction by transaction basis. We've had difficulty in those satellite contracts in getting the brokerage community to devote the proper amount of resources to support those contracts and to execute the orders."

Thompson said NYMEX will decide by the end of the year whether to re-launch the two contracts with less costly electronic trading. "And I think because we will do it electronically, we may be able to place the machines in a wider array around the country so that we can have more direct access to the contracts electronically."

NYMEX launched the Permian contract in May 1996 and the Alberta contract in September 1996. While the Kansas City Board of Trade's western gas futures contract at Waha, TX, has grown, the NYMEX contracts have failed to achieve liquidity. "We do believe that there is a tremendous value to those contracts in the West," Thompson said. "We need to find a way to get through the liquidity crunch, and we suspect that we will look very closely at electronic trading for those markets and also developing a market-maker function where a large company that is interested, has assets in the region that would normally be delivered through the delivery mechanism, might be able to be a constant market maker." Joe Fisher, Houston

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