NYMEX transition to electronic trading surpasses expectations
When CME and New York Mercantile Exchange (NYMEX) agreed in June 2006 to list NYMEX energy products on the CME Globex electronic trading platform, the two exchanges knew that a symbiotic relationship was developing. CME gained a link to the attractive energy markets. These volatile markets are now available for CME Globex customers looking to expand the range of the products they trade.
Simultaneously, NYMEX benefited from CME's technology. This put NYMEX on a competitive footing with the fast growing, all-electronic competition that is growing exponentially. NYMEX gained access to a global audience of traders already connected to the platform around the clock, and an immediate and efficient way to increase both distribution and volume. More than 80 countries have access to CME Globex, and there are nearly 1,100 direct CME Globex connections.
As a result, energy traders around the world benefited from increased access to NYMEX benchmark energy products.
The deal also helped replicate the liquidity of open outcry in New York because CME Globex offers NYMEX's benchmark physically delivered energy products – a distinguishing factor from its competition, which only offers cash-settled energy products. CME Globex also offers full- and half-size cash-settled NYMEX contracts.
From the start, both exchanges knew the partnership would be a success – and they didn't have to wait long for proof.
On June 12, 2006, the first day of trading, 62,695 NYMEX contracts were traded through CME Globex. By year end, NYMEX saw its total annual trading volume increase 35 percent to a record 276.2 million contracts traded. The average daily volume (ADV) of electronic trading grew 87 percent in 2006.
What are the reasons for the success of NYMEX's energy products on CME Globex? Three factors provide the answer: increased global demand for energy, a new group of energy investors and the speed of the CME Globex platform.
The right markets at the right time
The NYMEX product suite covers many of the most demanded,
essential products in the world. NYMEX is home to benchmark
futures contracts in natural gas, gasoline, heating oil and crude
oil. It is the largest regulated marketplace for energy futures –
and currently the largest regulated electronic marketplace for
energy futures.
Energy prices are subject to the influences of such factors as geopolitical events, war and weather. Increased demand from the Asian markets, specifically China and India, also is altering the energy paradigm.
The growing need to hedge risk in the energy markets has increased both trading volume and liquidity, and these markets provide increased trading opportunities. As the energy markets have moved to a more demand-driven model, the investment community has taken notice.
Institutional investors – hedge funds, pension funds and Wall Street firms – have recognized the transformation of energy commodities into a tradable asset class. In search of profits, these groups are investing massive funds into the energy marketplace.
Technology has played a key role in bringing commodities to the foreground. Hedge funds, pension funds and other institutional investors find electronic trading more appealing for the speed, anonymity and price transparency it provides. The greater the volatility, the bigger the opportunities. Electronic trading offers unmatched access to this volatility.
CME Globex: an unparalleled global trading platform
While electronic access is ideally suited to today's energy
markets and its spectrum of global traders, the trading platform
itself is key. All platforms are not equal, and CME Globex is
considered to be the world's leading electronic trading platform.
Customers benefit from tight bid-ask spreads, high-quality
trade execution, unmatched transparency and exposure to a
broad user base. A distinct advantage of CME Globex is that
every market participant has equal access to the marketplace.
This level playing field creates opportunities for a wide range
of customers, which in turn increases volume, making for deep
and liquid trading.
Since the inception of CME Globex in 1992, CME has made continuous investments in technology to increase the speed and functionality of the platform. Between 2004 and 2006, for example, the time required to execute a trade decreased more than 50 percent, down to a few milliseconds. The platform handles more than 75 percent of CME's trades, as well as more than 70 percent of NYMEX's volume as well.
Ongoing platform enhancements
While the daily volume for NYMEX averaged 707,000 contracts, the energy products ADV totaled 593,000 contracts.
CME Globex provides the technology that best serves the needs of energy customers interested in trading crack spreads, calendar spreads, strips and intercommodity spreads, such as heating oil/gasoline spreads. Implied functionality ensures integrated bids and offers in spreads and outright contracts, to provide more liquidity and the best possible prices for all customers.
CME is also enhancing its electronic market data capabilities, allowing more data to be delivered more efficiently and quickly. One innovation, known as FAST (FIX Adapted for Streaming) is a recent collaboration between FIX (Financial Information Exchange) and CME. Targeted for launch during third-quarter 2007, FAST is expected to become a central component of all high-volume FIX implementations for both market data and order routing. It will enable traders to receive data faster, allowing them to react to market trends and respond with orders and quotes faster.
CME Globex offers market participants a choice of customized low-cost, high-bandwidth connectivity options. CME DIRECTLink, a CME-managed connectivity solution, provides customers with the hardware, back-up connection and circuits required. Client DIRECTLink allows customers to manage their own network connection and equipment, connecting to CME within CME-approved telecommunications vendor clouds.
Another option, the CME Local Network (CME LNet), provides a direct connection to the exchange's fiber optic transport network, further reducing latencies. This innovation, launched during fourth quarter of 2006, is of particular interest to algorithmic and proprietary trading firms that require speed and reliability in trading transactions, as well as to customers in Asia and Europe.
NYMEX on CME Globex: a winning combination
NYMEX's substantial volume growth on CME Globex reflects
traders' embrace of electronic trading, around the world and
around the clock. Today, trading isn't about human interaction.
It is about execution – getting the best price for customers at
the greatest possible speed.
www.cme.com/nymexoncmeglobex