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Monday, December 19, 2005

Challenges Facing the New York Mercantile Exchange

Gold is trading around 25-year highs. Crude oil continues to hover around $60 per barrel. Natural gas recently jumped to an all-time record, settling above $15 for the first time ever. Copper is in the midst of a powerful bull market. Gasoline prices have been making headlines for month. These are the best of times for the New York Mercantile Exchange, the world’s primary venue for trading in energy and metal futures. NYMEX trading volumes have been surging, and the exchange’s memberships are at historically lofty levels at the time of this column, a full NYMEX membership last changed hands for $3.6 million.

So everyone loves the NYMEX right now? Not exactly. While many other futures markets have been moving swiftly toward electronic trading, the NYMEX’s flagship metal and energy futures continue to trade in traditional, open-outcry pits during regular business hours. During times like these, when trading is heavy and volatility can be extreme, floor brokers standing in the trading pits simply become overwhelmed by the sheer volume of paper and the speed with which the markets are moving. This can create maddening delays in fill confirmations. Traders occasionally don’t know if they’re filled, and if so, at what price.

Computerization surely could save the day everyone knows by now that electronic trading is undeniably faster, more accurate, and less expensive than trading in the old-fashioned pits. But NYMEX members, who make their living on the trading floor and who effectively control the exchange, aren’t eager to change. And at the same time, management looks seriously out-of-touch. NYMEX’s new open-outcry trading floor in London to compete against the all-electronic IntercontinentalExchange was dead on arrival. And its latest marketing campaign, touting itself as “fitted with the latest technology humans” is mind-boggling. That’s just not what today’s futures trader wants from an exchange.


ACCESS PLATFORM WOES

With so much opportunity in the metal and energy markets, many active traders understandably wish to participate in the after-hours trading session. NYMEX does operate an electronic trading platform for this purpose, known as ACCESS, but the system has some dire shortcomings. Every futures brokerage company offering overnight trading in metal and energy futures is keenly aware of these glaring limitations, but our experience has been that most traders aren’t.

The most serious ACCESS weakness has been the total and inexplicable lack of an open interface. Most electronic markets the Chicago Mercantile Exchange's Globex system, or the Chicago Board of Trade's eCBOT platform, for instance allow brokers to connect their systems directly with the exchange, thereby allowing orders and fill confirmations to be routed back and forth electronically, with no human intervention. But as hard as it may be to believe, ACCESS has never offered an open link.

Consequently, orders for the after-hours energy and metal markets must print on a trading desk, and clerks must manually enter these orders into the ACCESS system. When an order has been executed, ACCESS neither reports the fill nor alerts the broker in any way to the fill, which gives us little choice but to continuously and manually, of course search for filled orders on the system. Though we all do our best to work around these ACCESS shortcomings, it’s painfully inefficient. Of all the exchanges to which we offer access, and of all the electronic trading platforms with which we deal, nothing’s more frustrating than trying to work with the ACCESS platform.

In a nutshell, NYMEX desperately needs to improve its electronic trading platform, and fast. An open API (application programming interface) is a must, to which brokers can connect their systems, and through which orders and fills can flow quickly, efficiently, and automatically. The brokerage companies that send business to NYMEX deserve better, and certainly the trading public, which values speedy order execution and fill reporting, deserves better.


NYMEX NEEDS TO MODERNIZE

Happily, there could be signs of progress ahead. A possible open interface to ACCESS may be in the works, though the word is that it will work only for energy futures, and not metals. Then there’s the new ClearPort platform that NYMEX finally has begun using for EmiNY energy contracts, but early reviews are that it’s far from perfect. Perhaps the most exciting prospect for improvement is the news that the Chicago Mercantile Exchange reportedly is interested in launching a bid for 10% of the New York Mercantile Exchange. Even the slightest hint that energy and metal futures someday could trade on the CME’s battle-tested Globex platform is enough to get us excited.

It’s imperative that NYMEX understand that time is of the essence the trading public, futures brokers, and the exchange itself need solutions now. Gold, silver, crude, heating oil, and all the other NYMEX products are terrific. But the exchange needs to take some bold, decisive steps toward modernization. We’ll be hoping that this important U.S. financial institution is up to the challenge.