When the Intercontinental Exchange (ICE) got the blessing from New York Board of Trade members to purchase the softs exchange, those markets, often the least liquid of U. S. markets, suddenly heated up. Upon the announcement, the New York Mercantile Exchange (Nymex), which shares a floor and a history with Nybot, and competes with ICE, announced its own launch of electronically traded cash-settled softs contracts. Then things got really interesting.
C. Harry Falk, the recently deceased president and CEO of Nybot, referred to the Nymex softs, which include cocoa, coffee, cotton, frozen concentrated orange juice and sugar contracts, as “cash-settled clones,” and characterized the move as a ploy intended to interfere with the Nybot-ICE merger and negate Nybot’s lease agreement for the trading floor it shares with the Nymex. According to Falk, the lease includes non-compete language preventing the Nybot from listing competing products.
A senior trading advisor at a commission house says he is skeptical about the success of the Nymex softs contracts, given that commercial entities will be reluctant to trade cash-settled contracts, which are generally of interest only to speculative traders. “Liquidity will suffer if commercial entities don’t participate. [Nymex Chairman Richard Schaffer] got his nose out of joint and did it out of spite .... There’s really no other way to read into it,” he says, noting that the contracts were bound to make interesting cocktail conversation as they were announced the day of the joint Nybot-Nymex holiday party.
Jurgens Bauer, an independent softs trader at the Nybot says, “The battle lines have been drawn for electronic trading,” and he expects the showdown will only hasten the demise of open outcry trading at both exchanges.
A series of phone calls to futures brokers turned up not one who was trading the Nymex softs contracts or marketing them to customers. “There’s something not right about them launching it before the holiday weekend,” says Boyd Cruel, senior softs analyst at Alaron Futures and Options. “They didn’t [call us] and they are not pushing it. That’s why I don’t think the Nymex is pushing this seriously.”
Nymex is required to give 24-hour notice of its intent to list and trade the contracts to the Commodity Futures Trading Commission (CFTC). The CFTC reports Nymex complied with the self-certification process, but the contracts were not without problems.
“They didn’t specify the last trading day properly,” says Martin Murray, assistant associate director in the product review branch of the CFTC. “They listed them in haste and they didn’t have spot month speculative position limits initially.” He adds that when the errors were discovered, Nymex didn’t contest the issues and corrected them.
A Nymex marketing representative says that the contracts had been in development for “some time,” would appeal specifically to funds and retail traders and that aggressive marketing of the contracts would begin in earnest after they launch on the Chicago Mercantile Exchange’s (CME) Globex trading platform on Jan. 8. As of Jan. 10, only 95 contracts had traded according to the CME. The contracts will clear on Nymex ClearPort and the exchange is waiving trading, transaction and clearing fees through June 2007.
ICE says that after the merger there will be no changes to the Nybot exchange fee structure and that floor and screen trades will be offered at existing, equivalent rates. Nybot will facilitate screen-based training sessions beginning on Jan. 8, and enroll qualified users to access the exchange through the WebIce trading screen.
