With the New York Mercantile Exchange on Monday launching side-by-side trading of Nymex Division energy futures contracts on CME Globex, the electronic trading platform of the Chicago Mercantile Exchange (CME), traders across the country are divided on the move’s impact on the energy markets. Cash-settled energy futures contracts will be offered for all listed months on June 11 for trade date June 12.
First announced in April (see Daily GPI, April 7; May 12; May 22; May 30), Nymex said the deal would bring access to electronic trading of Nymex products “virtually 24 hours a day” on the CME Globex electronic trading platform. In the initial phase of the launch, Nymex will offer cash-settled energy futures contracts for all listed months. The second phase of the launch will offer physically delivered energy futures contracts no later than six months from the initial launch.
As traders expressed their concerns about the side-by-side trading start-up, some saw the price increase in natural gas futures on Thursday as traders covering short positions ahead of the implementation of the new trading format. July natural gas closed Thursday at $5.191, up 21.7 cents on the day. Others were concerned the launch of the new format was rushed in order to compete with the IntercontinentalExchange (ICE), a sizeable electronic trading platform with a wide array of energy contract offerings.
“A lot of traders got out of swap positions and the side-by-side trading starts Monday, so that uncertainty prompted traders to cover positions. Everyone is worried about what is going to happen. There are supposed to be laptop computers or hand-held computers around the ring,” said a New York floor trader. Side-by-side trading is designed to give customers not only bids and offers from open outcry trading but also make available bids and offers electronically. Indications are that some floor personnel expect the initial implementation of side-by-side trading to be “chaotic.”
Some brokers think the market will adapt. Rafferty Technical Research’s Steve Blair said that while there will likely be confusion at first, he expects the side-by-side format will be accepted largely. “The thing that could cause a little bit of confusion is the fact that financially settled contracts aren’t fungible with the physical delivery contracts, so you can’t use one to offset the other,” he said. “I think the format will get a slow start, but eventually it will take hold once people get comfortable with it.”
Another East Coast broker said he didn’t expect any “glitches” next week with the new format. “Nymex has been trading the emiNY contracts simultaneously, so I wouldn’t expect any problems with the energy futures contracts,” the broker said. “ICE has also been trading simultaneously with Nymex’s pit, so I think it is obvious that Nymex’s plan is to hopefully get some business away from ICE.”
The broker said he didn’t expect any “fireworks” to accompany the new format’s rollout. “We will have to see what happens Monday,” he said. “When they did side-by-side trading in Chicago, it really didn’t do anything to price. To me, the theory is if you bring more volume and more open interest to the market, it will lower volatility. Some people think it is the other way around, but that is not what I believe.”
For its part, the CME said Friday that everything was in place for Monday. “In our relationship with Nymex, the Chicago Mercantile Exchange is the technology provider and Nymex is the customer,” said Mary Haffenberg, a spokeswoman with CME. “They picked us because we have the widest distribution of any electronic trading platform and it is proven to be reliable and fast. On the other side, Nymex has arguably the largest and most liquid offering of energy product of any exchange.”
As for any perceived confusion or adverse impacts on energy prices during the start-up of side-by-side trading, Haffenberg said she “couldn’t imagine” anything going awry. “It starts Sunday night for trading on Monday and we expect everything to go as planned.”
In related news, Nymex on Friday announced accountability levels and position limits for financially-settled heating oil and natural gas futures contracts on the CME Globex system. The position accountability levels for the heating oil financial futures contracts will be 7,000 contracts for any single month or all months, aggregated with the physically-delivered heating oil (HO) contract. Expiration position limits are 1,000 contracts. The position accountability levels for the Henry Hub financial last-day and penultimate financial futures contracts will be 12,000 contracts for any single month or all months, aggregated with the physically-delivered natural gas (NG) contract. Expiration position limits are 1,000 contracts. The reportable level for the financially-settled heating oil and natural gas futures contracts will be 100 contracts.
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