Open outcry fading away as Nymex fends off rivals

New York Mercantile Exchange (Nymex) chairman Richard Schaeffer said today that 80% of the exchange’s business is now done electronically, as the open outcry trading floor becomes “less and less meaningful”. He also outlined ambitious plans for 2008, and refused to rule out a merger with another exchange.

Speaking at a press conference in London, Schaeffer stated that electronic trading has been rapidly expanding across all Nymex product offerings. Though he emphasised that the trading floor is still very much part of the business, he stated that “we have already started to cut down on the floor as part of our expense reduction plan. The number of people working on the floor has reduced dramatically.”

Nymex reached agreement with Chicago Mercantile Exchange (CME) to list its products on the CME Globex electronic platform in April 2006, with side-by-side trading of physically delivered energy contracts beginning in September 2006. Electronic trading allowed Nymex’ market share in light sweet crude to jump 19% by the end of the same year. Electronic options trading was launched in June 2007.

Today Schaeffer pointed out, however, that the floor was still vital, particularly for the options business, which has grown in open outcry trading as other products have shrunk. Electronic systems are as yet unable to process the complex nature of options trading as efficiently as floor traders, who still carry out 90% of Nymex' options business.

While Schaeffer doesn’t see open outcry ending immediately, he says the growth of electronic trading is a strong trend. He points to the successful migration of the exchange’s Comex metals business from floor to screen as vital in maintaining a competitive business. “Chicago Board of Trade [CBOT] tried to go after these products and started to make some headway,” he says, “but since we went electronic we have successfully taken most of those contract volumes back.”

Nymex plans to accelerate its metals business in the coming year, with a new president of the Comex division expected to be announced within weeks. Steel will be a particular area of focus, with domestic US and global futures contracts “on the radar” at the exchange.

After heading off CBOT’s move in metals, Nymex has also managed to fend off rivalry from ICE, according to Schaeffer. The Dubai Mercantile Exchange (DME), a joint venture between Nymex, Tatweer and the Oman Investment Fund, now commands nearly 100% of Middle East sour crude futures volumes. “ICE came out with a Dubai contract and it initially showed some positive signs, but it now trades virtually zero,” says Schaeffer.

Indeed Schaeffer claims that Nymex is well ahead in its rivalry with ICE. “It’s important to note that in all energy contracts worldwide, 83% are held by Nymex,” he says.

The rivalry between the two looks set to spread to Europe, where Nymex’ recent purchase of a 15% stake in Norwegian broker / exchange Imarex will give it access to a clearing house. “Having a clearing house in Europe could be very positive to us,” says Schaeffer. “It’s a great opportunity for us to take advantage of the uncertain clearing arrangements for European energy market participants.” Schaeffer expects Nymex to offer clearing services in Europe during 2008, though he did not name an exact date.

Nymex has embarked on a cost-cutting ‘efficiency plan’ which will include 120 jobs being cut over the over the next five quarters. The exchange is also “strongly pursuing” a move away from its current headquarters in Manhattan, while Schaeffer refused to rule out more acquisitions – or being acquired. “All options are open,” he says. “We’re always in talks with different potential partners. The exchange business is consolidating.”