New York Mercantile Exchange (NYMEX)

The New York Mercantile Exchange (NYMEX) offers derivative products in commodities. It is part of the CME Group of Chicago, which also owns and operates the Chicago Mercantile Exchange, the Chicago Board of Trade (CBOT) and Commodities Exchange Inc.

Located at One North End Avenue of the World Financial Center in the Battery Park City, Manhattan, New York City, it has offices in other US cities such as Boston, Washington D.C. and San Francisco. It has overseas offices in Dubai, London and Tokyo.

Both of the two divisions of NYMEX, New York Mercantile Exchange and Commodities Exchange Inc. (COMEX) were once separately owned independent entities. Prior to 2008, NYMEX Holdings Inc. was the parent holding company of New York Mercantile and COMEX. The company was eventually taken over by the CME Group of Chicago after signing of a definitive acquisition agreement for acquiring NYMEX Holdings for $11.2 billion in cash and stock. The takeover was finally completed in August 2008.

Apart from NYMEX and COMEX, the CME Group of Chicago operate two other designated futures contract markets; the Chicago Mercantile Exchange and the Chicago Board Of Trade.

The New York Mercantile Exchange is a premier derivatives exchange that offers and handles billions of dollars worth of futures and options contracts for metals, energy products and other commodities. Trading is done on the exchange’s floor as well as on its electronic trading platform. The price that consumers pay for these commodities depends upon the prices quoted on the exchange.

Trading on NYMEX is regulated by an independent US government agency, the Commodity Futures Trading Commission. Trading on the floor is done by brokers sent by the companies who want to trade on NYMEX. All trading is done by company representatives and the employees of the exchange are there only for recording transactions.

With the introduction of electronic trading in 2006, most of the trading is done on a software-based trading platform. However, the NYMEX still maintains a trading floor, or what is commonly called a trading pit where trading is done by shouting and using complex hand gestures to indicate price, quantity and whether one is buying or selling a contract. To avoid this traditional method of trading getting extinct, the NYMEX has published the hand signals used at the NYMEX trading floor.

Early History

The history of commodities exchanges can be traced back to the 19^th century when commodity traders started forming market forums to make it easier to trade commodities. These forums were primarily places where traders met to establish the rules of trading. These forums proved to be so useful that by the end of the 19^th century, there were approximately 1600 such marketplaces at ports and railroad stations or wherever it was convenient for businessmen to meet.

Finally, in 1872, a group of dairy merchants belonging to Manhattan took the initiative and established the Butter and Cheese Exchange of New York. The name was changed to the Butter, Cheese and Egg Exchange with the inclusion of eggs as another traded commodity. The exchange eventually got its present name, the New York Mercantile Exchange after canned goods, poultry and dried fruits were opened for trade.

With the building of centralized warehouses in main business centers such as New York and Chicago, the smaller exchanges in other parts of the country began to disappear and over time, business in exchanges like NYMEX began to increase. The Commodities Exchange (COMEX) was established in 1933 by merging four smaller exchanges; the Rubber Exchange of New York, the National Metal Exchange, the National Raw Silk Exchange, and the New York Hide Exchange. In 1970s, the same trading floor in 4 World Trade Center was shared by NYMEX, COMEX and some other exchanges.

Potatoes

The reputation of NYMEX suffered a major blow during the 1970s. There had always been a lot of trade in futures of the Maine potatoes crop on the NYMEX floor. Manipulation by potato inspectors and traders was commonplace if one believes Leah McGrath Goodman who wrote The Asylum, a book on the subject. What blew the lid was the potato bust of 1970s when J.R. Simplot, the Idaho magnate shorted potato futures in large numbers. It led to a situation where a large number of contracts could not be settled on the expiry date, which resulted in a large number of defaults as deliveries could not be affected. Following public outrage and hearings by the freshly constituted Commodity Futures Trading Commission, NYMEX was barred from trading in potatoes as well as from offering new products for trade.

Oil

The potato ban was the result of NYMEX not being able to maintain the “sanctity of its contract”, which is the essence of an exchange. The very existence of NYMEX was doubtful at this time because the absence of a good commodity meant that traders could not make money. Finally, NYMEX’s new chairman, Michael Marks, son of Francis Q Marks, the commodities icon, in collaboration with economist Arnold Safer, though of reviving the old heating oil futures contract as they felt that it stood a chance of becoming a good commodity to trade when the government deregulated heating oil. A carefully drawn futures contract started trading on a small scale in 1978, and the initial participants were small scale suppliers in the North.

Oil prices were traditionally controlled by oil super-majors and government controlled groups such as OPEC. The NYMEX oil futures contract was an open market with transparent pricing, something that came to be perceived as a threat by vested interests. Moreover, it was not only heating oil but also crude oil, gasoline and natural gas that were involved.

The Growth Story

Oil futures contracts proved to be the revival story of NYMEX. The energy business proved to be a big hit with traders. The scene at the trading pit was a cacophony of yelling traders flashing pit cards. The pit suddenly became a place where people could become rich overnight and many traders and executives did become millionaires by trading in NYMEX oil futures. Vulgar display of wealth became common with lavish parties being thrown and vacations at exotic destinations. Some of them also got involved in drugs and prostitution and drugs came to be traded right there on the trading pit.

COMEX, which was among the other exchanges that shared the trading floor with NYMEX at 4 World Trade Center, had traditionally frowned upon NYMEX as it was smaller and had a bad reputation  because of the potato bust. Things changed with the energy boom as NYMEX became much larger and even wealthier. Eventually, COMEX merged with NYMEX under the latter’s name. By late 1990s, the trading floor could not accommodate the large number of NYMEX traders and NYMEX moved to a new building, a part of the World Financial Center complex in South West Manhattan in 1997.

September 11, 2001 – 9/11

Although the NYMEX building did not suffer major damage in the 9/11 attacks, it lost a number of its people as many NYMEX people maintained a close relationship with people and organizations at the World Trade Center. Even in face of such devastation, the NYMEX management and staff was able to resume trading within a short period. To protect against a future terrorist attack or natural disaster, the exchange built a trading floor backup facility outside New York City with 700 trader’s booths, 2000 telephones and a computerized backup system at a cost of $12 million.

However, the trading floor and headquarters of New York Board of Trade (NYBOT) was totally destroyed in the 9/11 attacks. NYBOT signed a lease agreement with NYMEX on February 26, 2003 for moving into NYMEX’s headquarters and trading facility ay World Financial Center.

Electronic Trading

NYMEX enjoyed a virtual monopoly on oil futures and the over-the-market market or the grey market was no match to its might. However, the NYMEX trading system was still the traditional open outcry system. A major threat to NYMEX’s market share came in the shape of over-the-counter electronic exchanges. Part of this trend were Enron’s trading system and Jeff Sprecher’s IntercontinentalExchange or ICE, which started trading oil contracts designed on the lines of NYMEX’s futures contracts.

The management felt that electronic trading was the only way to maintain the competitiveness of the exchange. Despite resistance from pit traders who saw electronic trading as a threat to their incomes and lifestyles, NYMEX opted to team up with the Chicago Mercantile Exchange and started using the CME GLobex in 2006. Oil companies, banks and hedge funds stopped sending their representatives to the trading floor or making telephone calls and started trading directly on the trading platform online.

Initial Public Offer

Finally, the executive management decided to sell NYMEX in parts and leave and opt for the golden parachute. In 2006, after a successful initial Public Offering (IPO), NYMEX was listed on the New York Stock Exchange (NYSE). Within a few hours of opening of trade on NYSE, executives and seat owning members saw their wealth increasing by millions of dollars. The remaining parts were sold off to private investors and the Chicago Mercantile Exchange (CME). The CME started underplaying the NYMEX name and eventually reduced it to a brand name used by the CME. The once popular NYMEX open outcry trading system came to be used by only a small number of people trading options.

Problems with Gold Delivery

There were problems with gold delivery to holders of COMEX gold futures contracts in 2009. Besides delayed deliveries, it was reported that some investors received deliveries of bars that did not match the serial number and weight of their contract. On investigation it appeared that the problem was not with slow movement from warehouses, which gave rise to concerns that there were not enough inventories with COMEX to back its warehouse receipts.

NYMEX trading Platforms

NYMEX had traditionally been using the open outcry trading system, which gradually gave way to electronic trading on the Globex platform of CME. Most of the trading is now done through its online trading platform.

Commodities Traded on NYMEX

• Coal
• Crude oil
• Electricity
• Gasoline
• Heating oil
• Natural gas
• Palladium
• Platinum
• Propane
• Uranium

Commodities Traded on COMEX

• Aluminum
• Copper
• Gold
• Silver