In reaction to requests from both the commercial and large speculative trading fund communities, Nymex is ready to launch — possibly as soon as Friday — large order execution (LOX) trading for natural gas, which attempts to match buyers and sellers willing to trade lots of between 250 and 5,000 contracts. Similar to the current open-outcry trading for smaller lots, LOX trading will be conducted in the pit and will be supported by a LOX bookkeeper who will announce quotes, match buyers with sellers and facilitate the order execution.

“Many of our customers have been requesting this,” a Nymex spokesperson said. “The interest is from both natural gas companies and hedge funds. It’s something that is available on other futures exchanges, and it’s something we wanted to do in keeping with our overall plan to introduce some of the over-the-counter type instruments to our market.”

LOX addresses the two common complaints — time lag and price risk — that traders have when they execute their large lots under the current open-outcry system. Because LOX trades are settled in lump sum at a price transparent to the trader, it could help to minimize the trader’s price risk.

And while LOX trading is available on other exchanges, Nymex is taking it a step further by allowing local traders — many of whom trade for their own books and by doing so augment the market’s liquidity — the ability to “piggyback” on LOX trades. For example, if a local or group of locals wants to get in on a 500-lot offer put out there by a large trader, they will have the ability to participate in the trade and realize that price. In this way, the local trader is not shut out of a potentially large portion of the trading activity.

The key question for locals, according to local Ira Hochman, is how seamlessly they will be able to lay-off their risk. “If you or a group of locals get long through one of these trades and everyone in the ring knows you are long, the powers that be may try to push down the price to see if they can flush you out. However, if they did not know that you were one of the ones in on the LOX or if you can hedge your risk by selling another month at the same time, your risk is minimized. The net effect of this is that it will probably increase spread trading,” he said.

Nymex has not finalized the pricing for this LOX trading, but a Nymex spokesperson believed it would cost about $2.50 per quote, with the cost dropping to $1.50 per contract if the trade is done.

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