With the flight to more secure trading channels in the industry and demand for online trading, a new online futures exchange was launched last Friday. The Merchants’ Exchange opened a fully electronic cash-settled energy futures market, 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, a futures analyst with IFR Pegasus. However, Evans was skeptical that a new futures exchange could provide anything the New York Mercantile Exchange currently cannot offer. It will be a tough up-hill battle to get the new exchange off an running, said Evans, noting that others, such as the Kansas City Board of Trade, have made similar moves but failed.

Nymex itself has struggled to get new contracts off the ground, shelving gas futures in the Permian Basin and at the Alberta Hub and electricity futures at various locations. But with the absence of EnronOnline and the volume growth seen in the Nymex Henry Hub futures contract and on IntercontinentalExchange, there may be enough room in the market, Evans admitted.

“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 provide memberships; ownership is separated from the ability to trade. It will have trading privileges, however, that will be provided to companies who are clearing members or customers of clearing members at the Board of Trade Clearing Corp., which also is the clearinghouse for the Chicago Board of Trade.

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 [immediately], 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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