NYMEX pushing new derivatives, improvements amid increasing exchange competition

Oct. 8, 2001
The New York Mercantile Exchange plans to continue introducing energy derivatives products, including internet-based trading, and to improve existing products in an increasingly competitive market.

The New York Mercantile Exchange plans to continue introducing energy derivatives products, including internet-based trading, and to improve existing products in an increasingly competitive market.

However, NYMEX Pres. J. Robert Collins Jr. emphasized that floor trading will continue to play a vital role in providing liquidity.

"Great success is when you have a very fluid complex of products that covers the global markets," Collin told OGJ in a recent interview.

Collins was in Houston last month promoting the Sept. 5 launch of North Sea Brent crude futures trading and the Sept. 7 launch of Brent options trading. The NYMEX Brent futures contract set a 1-day exchange record with trading of 13,293 lots, more than double the previous exchange record for trading in a new contract.

Collins's views

Appointed NYMEX president in July, Collins previously was a trade representative on the exchange board while working as a senior vice-president of natural gas trading at El Paso Merchant Energy.

"One mistake NYMEX made was not evolving with the risk management business over the last 15 years. That's over. The field of risk management is changing every month," Collins said. "The new NYMEX will be evolving and responding rapidly.

"You should know that we are investigating interesting new forms of business; stay tuned," Collins told reporters during a news conference, but added that it was too early for him to elaborate on any specifics.

"I think what you should expect from the New York Mercantile Ex- change is incremental improvements on all forms of delivery. I don't believe in the strategy of withholding all possible incremental improvements and putting them in one big platformellipseThe expectation of a one-time fix-it-all is, I think, unrealistic."

Recent evidence of NYMEX's promised improved responsiveness was the launch of the internet-based version of its electronic off-hours system for futures contracts on Sept. 14 following the Sept. 11 terrorism attacks upon the US.

On Aug. 30, NYMEX delayed the start of the internet-based Access platform to give its customers more time to prepare. But after the attack on the World Trade Center, the exchange board's executive committee declared an emer- gency rule authorizing deployment of the internet-based Access system while regular open-outcry trade on the floor of NYMEX still remained closed.

"Our success in this session helped us make a symbolic statement to the world, but especially those tyrants who sought to devastate and destroy the American system of enterprise and free markets. In our own small way, we helped show them that no act of terrorism will ever diminish the American spirit and our leadership role in the global economy," Collins and NYMEX Chairman Vincent Viola said in a joint statement.

NYMEX has offered electronic trading on Access via a NYMEX proprietary network since 1993, but Sept. 14 marked the first time the internet version of Access was used for public trade.

Brent

On Sept. 7, NYMEX initiated a Brent options contract and a Brent-light, sweet crude spread options contract, based on the differential between the exchange's Brent contract and the light, sweet crude oil futures contract (also commonly referred to as WTI futures).

In order to attract business, NYMEX waived clearing and exchange fees for its Brent crude oil futures contract for the first year of trading and is offering rebates for 3 months on any light, sweet crude futures contract traded to offset a position in the NYMEX Brent futures contract.

The London-based International Petroleum Exchange previously was the sole trading exchange for Brent.

"This is not about my [trading] volume is x and theirs is y. This is not about NYMEX vs. IPE," Collins said. "This is not about a [trading] volume number. It is about seeing a reasonable flow of activity."

IPE CEO Richard Ward has said he welcomed the competition but had concerns about "splitting liquidity" (OGJ, Oct. 1, 2001, p. 34).

Collins said the nature of traders is that a subset of traders will create an arbitrage of Brent between IPE and NYMEX.

"My expectation is that you are more likely to see the IPE see a new level of interest," in Brent trading once the arbitrage opportunity exists, Collins predicted.

Meanwhile, NYMEX is counting on interest in its Brent offerings because "Brent is an existing product that has a trading history, so traders can step into that product with some degree of confidence about how it will react and respond to the market," Collin said.

"If you assume that the relationship between Brent and WTI is, in fact, well-defined, you can impute liquidity in the Brent contract. That again is one of the components that we are offering our customers," he said.

Online products

NYMEX is in the process of establishing enymex, an electronic sub- sidiary that will serve as a global internet-based exchange for the forward trading and clearing of contracts, with an initial focus on energy and metals.

Enymex would be a competitor to EnronOnline and Intercontinental Exchange (ICE). ICE recently agreed to merge with IPE.

No launch date is set for enymex, Collins said, adding that its progress has been delayed for numerous reasons, including the bankruptcy of a NYMEX contractor, GlobalView Software Inc., Chicago.

Another setback was the death of former NYMEX Pres. R. Patrick Thomp- son on July 19, 2000. He had unveiled the concept of enymex during a May 1, 2000, speech in New York.

"We're not finished developing enymex...We've had some classic technology delays," Collins said. "We are working very hard to make up lost time."

NYMEX is internally developing some of the front-end technology that it previously had contracted, he said. "We're now in the last one third of a development cycle."

People should realize that advantages exist to having both electronic and floor trading opportunities, said Coll- ins, who describes his job as providing liquidity in the best form and at the lowest possible cost.

"That asset is liquidity. If you really look at the strengths of my liquidity pools at NYMEX and analyze those carefully, you realize suddenly that all I really need to do is develop an elec- tronic spaceellipsearound those liquidity pools, and the two can be married together," Collins said.

"We have a system of pit trading that provides immense liquidity to the marketellipseI've got to figure out a way to marry the technology to the humanness of the process. And that is what we're engaged in right now with enymex. Don't confuse what we're about as pit vs. electronicellipseyou can marry the human process of pit trading with electronic trading and have the best of both worlds."

For instance, options trading is better handled on the floor than electroni- cally, he said.

"There are pieces of my floor business that have a very observable reason for being. There are other pieces that make much more sense to be electronic. So my job is to combine that all together."

Regulatory climate

Collins said a change in the regulatory climate has created more oppor- tunity for competition for online ex- changes and over-the-counter markets.

"We have been in a cocoon of 129 years of government-sanctioned franchise, and we've just gotten out of the cocoon. We're just sprouting our wingsellipsethis has been a very, very slow process over the last 18 months," Collins said.

The US Congress passed a Com- modity Futures Modernization Act in December 2000 that reauthorized the US Commodity Futures Trading Com- mission for 5 years and redefined its jurisdiction.

The bill's passage was preceded by months of discussion and compromises that prompted CTFC to implement changes in how it viewed its role even before the congressional action, a NYMEX spokeswoman said.

"I applaud the CTFC for opening up my market. I think that what they have done for the industry is absolutely outstanding. They have very quietly dereg- ulated it without a big splash," Collins said.

NYMEX Pres.
J. Robert Collins
"One mistake NYMEX made was not evolving with the risk management business over the last 15 years. That's over. The field of risk management is changing every month."
Click here to enlarge image

The changes enable NYMEX to pursue some businesses more aggressively now than it could have previously, he said.