NYMEX: Revisted

Discussion in 'Financial Futures' started by petrotrader, Jun 26, 2005.

Would you like to see the NYMEX go fully electronic?

  1. Yes

    12 vote(s)
  2. No

    3 vote(s)
  3. Don't Care

    0 vote(s)
  4. What stocks trade on the NYMEX?

    0 vote(s)
  1. I've seen numerous comments posted here about NYMEX "needing" to go electronic and had a similar discussion this afternoon, with a friend (equity option trader for a fund), about it as well...I think that the major issue is that the majority of the people outside of the energy trading biz don't understand it well enough to realize that it isn't as simple as moving everything to a screen, at least from the perspective of their customers, not to mention IT.

    Sure, there are large number of firms and individuals speculating on NYMEX futures but that's only a portion of the market (definitely the minority). Not only that, but I would argue that for each energy trade executed, at least 40% is OTC, and I think that's a very conservative estimate.

    I suppose they could list the futures electronically (side by side with the pit traded products) but most of the liquidity would stay in the pit. Frankly, moving to a screen isn't in the best interest of their customers, even if you exclude the locals. At the end of the day, the only people I know who'd like to see NYMEX go fully electronic are the funds that only trade electronic markets and retail/prop traders and they're a small minority of the market participants.

    Take a look at the companies registered for Clearport, which IMHO, provides a decent sample of the types of companies that trade energy.

    The majority of the people trading energy aren't simply taking a view on front month CL or NG. They're hedging production, consumption, product transportation, refining (crack spreads), generation (spark spreads), etc.

    And they need a human voice on the other end of the phone. Can you imagine trying to program a system to execute the following?

    Bid "X" for a NGG06 9.15 call if NGG06 trades at/above 9.00 but cancel the order if the EIA number is larger than expected (based on the ICAP's auction). Oh, and if I get filled on the calls, sell the XH06 NG strip, 10 times, at the market.

    Throw in a "conditional" trade that involves any OTC and/or basis products, regardless of whether it’s NG, CL, HU, HO, propane, or power and it becomes even less desirable to see the NYMEX go electronic.

    If I need to put on a complex, long dated, option strategy involving several different legs (various expirations and strikes, possibly both puts and calls) it would be damn near IMPOSSIBLE to get it done on a screen. Frankly, it can be very difficult to get it done in the pit. It usually requires executing a leg(s) in the pit and a leg(s) via an OTC voice broker.

    Take a look at the list of products cleared via Clearport and you'll see how many energy products are traded in addition to the NYMEX futures, not to mention NYMEX options. Obviously, the pit-traded contracts are only a small piece of the pie.

    At the end of the day, IMHO, until someone can figure out a way to generate significant liquidity in screen traded, long dated commodity futures and commodity options as a whole, there is little hope in the NYMEX going electronic.

    In the past 10 years we've seen dozens of screen-based energy trading platforms come and go. Most, if not all, of the significant OTC voice brokers have tried moving their business to screens and it didn't work for them either. Today their screens are either nonexistent or are used to provide their customers with indications, not tradeable quotes. ICE is surviving but only in NG and power swaps...They offer little to nothing in petroleum swaps and haven't been able to generate much liquidity for options, in any product.

    Conclusion: The only way that we're going to see U.S. based energy futures on a screen is if another exchange (e.g. IPE, Eurex or CBOT) decides to list them.

    Then again, if I were a "retail trader" wanting to take a position (via a screen traded product) on CL or NG, I would keep my eyes on the recently announced agreement between NYMEX and PHLX. My guess is that this will be the NYMEX's only real product(s) for "retail" traders.
  2. Probably, best combination would be IPE on Eurex's proven platform (based on feedback about how BAD IPE is with technology).

    But, I wouldn't hold my breath...