The New York Mercantile Exchange (Nymex) and ICAP plan to launch on July 18 an electronic market in same-day over-the-counter (OTC) options on prompt-month Nymex futures settlement prices for crude oil and natural gas.
The companies said 30-minute auctions will be held on the morning of each Nymex trading day. Daily Settlement Derivatives auctions on crude oil will take place from 8:30 to 9:00 a.m. EDT while the auctions for natural gas will run from 8:45 to 9:15 a.m. EDT.
The new auctions follow the successful launches of weekly oil inventory and natural gas storage auctions that ICAP launched last year. As with the weekly inventory auctions, Nymex will clear and settle the OTC options, ICAP will be responsible for order entry and Goldman Sachs will serve as a liquidity provider.
“These exciting new auction products are directly responsive to our clients’ requests and fill a gap in the tools available to them for managing energy market risks,” said Dennis Crum, CEO of ICAP Energy LLC. “Combining the exchange’s clearing capability and expertise with ICAP Energy’s distribution will create a deep liquidity pool for Daily Settlement Derivatives and attract a global audience.”
The options will be traded through an auction format in which the options’ prices are based solely on the relative demand of participants — the more popular the strike, the greater its value. The auctions aggregate liquidity across forwards, vanilla options and digital options and multiply the potential for efficient order filling.
Daily Settlement Derivatives will allow market participants to either hedge or take market risk directly associated with the daily swings in crude oil and natural gas prices. As with the existing auctions, these auctions will reveal the markets’ expectations for the underlying number that has proven to be valuable information for all investors.
Richard Ruzika, head of commodities at Goldman Sachs, said, “The weekly storage auctions provided an important new tool and liquidity for the energy market. These daily auctions will apply the auction framework in a new and powerful way.”
These auctions are conducted using a patented process of mutualized order filling developed and operated by Longitude Inc.. They also are based on the auctions on economic derivatives launched by Goldman Sachs in October of 2002.
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