Energy Exchange Race Heats Up; Chicago Mercantile Could Enter Fray, NGI Reports

Business Wire, Feb 17, 2006

DULLES, Va. -- As the IntercontinentalExchange (ICE), the New York Mercantile Exchange Inc. (Nymex) and Canada's Natural Gas Exchange (NGX) continue to compete for energy trading market share, there is the very real possibility that the Chicago Mercantile Exchange (CME) could throw its hat into the ring in the not-so-distant future, Natural Gas Intelligence (NGI) reported.

The energy trading landscape is changing as exchanges continue to evolve to stay competitive by best suiting the marketplace and their traders. The latest salvo was fired earlier this week as ICE announced plans to introduce more than 50 additional cleared contracts in its over-the-counter (OTC) energy markets during the first half of 2006, with the first 10 contracts for North American natural gas expected to be available for trade beginning Friday, March 3.

The ICE announcement follows Nymex's recent bombshell that it has decided to offer side-by-side open outcry and round-the-clock electronic trading of its benchmark, physically settled energy futures contracts. Nymex said it expected to launch side-by-side trading during the second quarter of 2006. The exchange also reported last week that it is moving forward with General Atlantic's investment proposal and hopes to launch a potential initial public offering this year, something that ICE found success with in Nov. 2005. ICE's shares, initially priced at $18-20, quickly ratcheted higher and have been trading above $50 lately.

Muscling in on Nymex's territory earlier in the month, ICE launched its West Texas Intermediate (WTI) Crude futures contract and set an immediate volume record. ICE said the WTI launch represented the strongest first-day trading volume for the launch day of any new contract in the exchange's history. Market participants Feb. 3 traded 38,633 WTI Crude futures contracts on ICE Futures, the regulated futures subsidiary based in London. Open interest at the close of business on Feb. 3 stood at 27,500 contracts.

Carving out its own niche in the energy universe is NGX, which began wholesale commodity exchange operations in February of 1994. The exchange has developed the AECO/NGX Intra-Alberta Market Center into one of the most liquid spot and forward energy markets in North America. Wholly owned by TSX Group Inc., operator of the Toronto Stock Exchange, NGX currently averages 400 traders online per day and offers electronic trading and price discovery, central counterparty physical and financial clearing and counterparty risk mitigation for both exchange and OTC transactions. The exchange provides physical spot and forward contracts within Canada and at some points within the United States.

"Right now, our business is largely concentrated in Canada," said NGX President Peter Krenkel. NGX is working to develop some new points it has added in the western U.S. "We have some interest from clients, particularly the ones who do business with us at AECO. We are optimistic that business will pick up in the U.S. going forward."

In addition to competing with each other, Nymex, ICE and NGX could soon find themselves competing with the CME in the energy arena, if the exchange opts to go that route. Recent comments made by the CME, the largest U.S. futures exchange, seem to point in that direction, according to sources. A non-compete agreement between CME and Nymex expires in June.

While CME isn't commenting, there's a loud speculation buzz in the market. Commercial Brokerage Corp.'s Ed Kennedy said he fully expects that the CME will get into energy futures at some point. "I didn't think they would renew the noncompete in the first place," he told NGI.

As for trading energy futures, the broker said Chicago is a good location. However, speaking from his 36-year history of working with exchanges, Kennedy said there could be a few speed bumps. "We had a contract on COMEX trading gold and we had a contract on the Chicago Board of Trade trading gold, but the industry was geared up to do their business with New York," he said. "It is tough to get a repeat contract off the ground on the futures side. You can do it on the OTC side because the terms of the contract are different.

"I have nothing against the CME entering the energy futures arena. If my clients want to deal with the Chicago contract, that's fine. If it works, I'll use it. However, you have to remember that we have been trading on the Nymex since 1991. All of the basis arrangements have already been established, so I think it is going to be an uphill fight for them. On the positive side, the CME and Chicago Board of Trade really back their new contracts. They really know how to get something out of the gate and running right away. New York still has yet to learn that."

Traders also note that if the CME does get into energy, a Chicago Citygate Hub contract could be in the works. However, that option brings into question liquidity concerns, dredging up a little history of past failed natural gas contracts at other exchanges.

"It might work, but liquidity is the key," one Northeast source told NGI. "We saw that it failed when the KCBT (Kansas City Board of Trade) tried the Waha contract and when the Nymex tried the Alberta and Permian (basin) contracts. They all lacked the liquidity to make it stick."