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Nymex and IPE set to battle over Brent futures Exchanges look set for direct confrontation if Nymex introduces trading in its own Brent futures contract in IPE turf – London or Dublin Alen Mattich Dow Jones/AP
The New York Mercantile Exchange and its great rival the International Petroleum Exchange are playing a game of chicken over who will dominate, and perhaps ultimately monopolize, the trading of energy futures.
The two exchanges look set for a direct confrontation if Nymex carries through with plans to introduce trading in its own Brent futures contract in either London, the IPE’s home turf, or, as seems more likely, in Dublin. Brent refers to oil produced from fields in the East Shetland Basin of the North Sea, which is used as a benchmark to price oil produced in Europe, Africa or the Middle East and shipped West.
While insisting that a decision “hasn’t finally been made,” Nymex President James Newsome all but confirmed Oct. 14 that the exchange was making every effort to launch a Brent contract in Dublin “as soon after Nov. 1 as possible.”
The reason Nymex thinks it can make inroads into the market for Brent futures — which in oil trading stands second only to Nymex’s own West Texas Intermediate contract — is the unhappiness many Brent traders feel about the IPE’s march away from floor-based, open-outcry trading to electronic trading.
Nymex remains committed to open-outcry trading, says Newsome.
“Indications have been very positive” from the London trading community about the possibility of Nymex setting up on this side of the Atlantic, Newsome said. IPE moves to boost screen trading Nov. 1 is critical because from that day, the IPE will offer open-outcry trading only in the afternoon session in an effort to boost its screen trading, which now accounts for less than 5 percent of Brent trade. Mornings will just be electronic trading.
“You could imagine a scenario in which an exchange planning to move from floor to electronic trading doesn’t have electronic yet but where floor traders defect,” says Benn Steil, a senior fellow at the Council on Foreign Relations.
If, in the weeks after Nov. 1, the IPE fails to attract trading onto its electronic platform, the exchange runs the risk of traders moving onto Nymex en masse, especially since Nymex’s plans are for a Brent contract that looks exactly like the one currently traded on the IPE.
But that risk is a relatively small one.
A more worrying prospect for the IPE would be if Nymex opened shop in London. A Dublin contract could be offered fairly quickly pending approval of the Irish regulator. But London isn’t as easy a proposition.
Nymex’s Newsome, who spoke to British regulator the Financial Services Authority Oct. 14, said approval to open a London exchange would take six months. Furthermore, he estimated that it would cost $40 million to $50 million to establish an exchange in London. Those sorts of sums would require Nymex to find a joint venture partner with deep pockets.
Nymex also carries the attraction of a better, more comprehensive clearing system than the IPE, which uses the London Clearing House, say traders. History on IPE’s side Although the IPE faces near-term risks over its Brent contract, over the longer term, history is on its side.
Exchanges have relentlessly moved from open-outcry to electronic trading during recent years, a move that’s always been greeted with loud protests from the floor traders and brokers.
By and large they’ve argued — as IPE traders do now — that the complexity of the contracts they trade makes maintaining liquidity and transparency impossible on an electronic exchange. And yet, the move from floor to screen has universally been accompanied by a fall in the cost of trading and an increase in volumes.
For futures, no one’s ever demonstrated that floor trading is better than electronic trading, says Steil at the Council on Foreign Relations.
IPE is lessening its reliance on floor traders who provide 30 percent to 40 percent of the exchange’s liquidity, called locals, by introducing professional market makers, like Sonny Schneider’s Schneider Trading Associates. Screen trading offers “mass distribution and level playing field,” says Schneider, who expects it will ultimately close the trading pits.
In IPE’s favor is the fact that its members are largely also shareholders in its parent company, InterContinentalExchange Inc., though there has been considerable friction between the company and this group of shareholders.
The IPE declined to comment.
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