With the flight to more secure trading channels in the industry and demand for online trading, a new online futures exchange is preparing for launch this Friday. The Merchants’ Exchange will launch a fully electronic cash-settled energy futures exchange, with Henry Hub natural gas futures (identical to the Nymex contract) and West Texas Intermediate crude. Brent crude, NY Harbor unleaded gasoline, NY Harbor heating oil, European gas oil and energy options all will soon follow.

The independent, demutualized electronic contract market will be cash settled and regulated by the Commodity Futures Trading Commission (CFTC). Its founders say it features a fully integrated, low-cost, all-electronic platform that matches trades in real time across a secure, proprietary network. Merchants’ provides clients with software that will enable them to link up to its secure network. The platform is a complete end-to-end solution for electronic trading services created by Exchange Cubed LLC.

“We have carefully put all the pieces in place to allow us to conduct a safe and orderly energy futures market. I strongly believe that, having accomplished this, liquidity will build in due course,” said Merchants’ Exchange CEO Robert S. Hamada. “We aim to meet needs in the energy market that are presently underserved.”

Hamada said Merchants’ has identified areas in which market participants are in need of “additional functionality for hedging and futures execution.” In particular, he said the industry lacks a “fully electronic, transparent market that enables block trading.”

In July 2000, the CFTC awarded designated contract-market status to the Merchants’ Exchange. The CFTC approved the six new contracts on Jan. 25, 2002.

“There should be room in the market for someone else to enter and it probably should be some kind of a clearing service so that you avoid the counterparty risk,” said Tim Evans of IFR Pegasus.

The new exchange, however, clearly faces an uphill battle. But with the absence of EnronOnline and the volume growth on the New York Mercantile Exchange and IntercontinentalExchange, there may be enough room in the market, Evans added.

“We think we’re going to capture our initial trading volume more from the [over-the-counter] markets,” said Exchange President Robert J. Stewart. He said he didn’t think Merchants’ would be drawing people away from Nymex. “There are things that have been traded over the counter, whether through EnronOnline or some other over-the-counter system, that can be standardized…cleared to eliminate counterparty risk and go through a regulated futures exchange, which is more transparent. That whole set of elements, I think, will be very attractive to a certain percentage of the users of the OTC markets.”

The Merchants’ Exchange won’t have membership; ownership is separated from the ability to trade. It will have trading privileges, however, that will be provided to companies who are clearing members at the Board of Trade Clearing Corp., which also is the clearinghouse for the Chicago Board of Trade, or who are customers of the clearing members at BOTCC.

Stewart said he expects a “fairly modest ramp up” of volume. “We’ve got quite a lot of firms that are signed up for us but there are technical issues that will keep some of them from being ready by Friday, but we should see the full group up and running in couple weeks.”

For more information on the Merchants’ Exchange, contact Stewart at (312) 922-2345.

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