Nymex May Spend $15 Mln to Bolster Electronic Trading System 2005-10-12 06:53 (New York) By Ann Saphir and Matthew Leising Oct. 12 (Bloomberg) -- The New York Mercantile Exchange, the world's largest energy market, will spend as much as $15 million to bolster its electronic trading as more customers demand the ability to buy and sell on computer screens. Nymex has hired Josh Levine, former chief technology officer for E*Trade Financial Corp., to make its electronic trading more robust, Nymex President James Newsome said. The improved system would be able to handle hundreds of thousands of transactions a day should Nymex eventually decide to offer its futures contracts on computer screens at the same time as they trade on the exchange floor, Newsome said. ``We don't see open outcry changing in the near future, but if the board or members decided because of market pressure that we wanted to go side-by-side, it's important that we have a system robust enough to do so,'' Newsome said in an interview at his office in Nymex headquarters in Manhattan. Nymex plans to sell a 10 percent stake to buyout firm General Atlantic LLC and sell shares to the public next year, which may make it more responsive to competitive threats and more likely to favor electronic trading. Most of Nymex's expansion plans have centered on the promotion of floor trading, also known as open- outcry, in locations such as London and Dubai. The closest rival to the Nymex, the International Petroleum Exchange, closed its London floor this year and shifted to electronic trading. The Chicago Mercantile Exchange, the biggest U.S. futures market, began trading more than half its contracts electronically two years after it sold shares in an initial public offering. Nymex has ``realized they can't put all their eggs in the open-outcry basket,'' said Robert Webb, a professor of finance at the University of Virginia. ``They recognize their electronic trading system is in need of repair.'' `Wake Up Call' The July 7 terrorist bombings of subways and a bus in London sent Nymex electronic trading volumes to record levels, slowing its Clearport system, Newsome said. The attacks, which occurred before the start of Nymex floor trading in Manhattan, triggered a decline of as much as 6.7 percent in New York oil futures. ``That was kind of a wake up call to us, that we needed to look at the robustness of our system,'' he said. The exchange is working to expand the capacity of the electronic system to handle ``greater volume, a greater number of log-ons and greater distribution.'' Nymex chief information officer Samuel Gaer and Levine ``are about ready to present a plan of action to the board,'' Newsome said in the interview yesterday. Electronic Trading New York-based Nymex trades futures contracts based on commodities such as crude oil and natural gas. The exchange's Clearport system, which handles electronic trades of contracts that are not offered on the floor, has more than doubled its volume in the past year, Newsome said. It trades about 200,000 contracts a day, versus 70,000 a year ago. The increase in electronic trading may benefit the Nymex because non-members, who pay higher fees than members, make up a greater percentage of electronic traders. Net income from the electronic trading and clearing more than tripled in the second quarter from a year ago, to $4.8 million. Profit from open-outcry doubled in the same period, to $10.3 million. London Rivalry Last month, Nymex opened an exchange in London to attract traders who had been working on the floor of the International Petroleum Exchange until it went electronic in April. The Nymex effort hasn't been successful so far. In its first month, the Nymex London floor traded on average 1.6 percent of the Brent crude oil contracts traded on the IPE. Volume fell to its lowest level on Oct. 5, when Nymex's volume was 0.3 of the 146,062 contracts transacted on the IPE, according to data compiled by Bloomberg. While Nymex has offered traders an electronic system for years, the exchange has done so only at times when its trading floor is closed. Nymex's increased spending on electronic trading ``is somewhat of a shift and a recognition of a strategic reality,'' said Craig Pirrong, director of energy markets at the University of Houston's Global Energy Management Institute. ``They want to have their umbrella handy in case it rains.'' `Competitive Threat' Pirrong said commodities such as oil and natural gas or agricultural products have fared better in open outcry trading environments, while financial contracts at exchanges such as the Chicago Board of Trade or the Chicago Mercantile Exchange tend to be traded electronically. ``They would like to maintain open outcry. That's where they want to be,'' said Pirrong. ``But they see a potential competitive threat from electronic trading.'' General Atlantic is the largest shareholder of Archipelago Holdings Inc., which owns the electronic ArcaEx stock exchange and is merging with the New York Stock Exchange. The private equity firm has also invested in other technology-related businesses such as software company Compuware Corp. and E*Trade, an electronic broker. The decision to upgrade its electronic systems came independently from General Atlantic's interest in the exchange, Newsome said. Still, General Atlantic's ``expertise and background in technology is certainly one of the reasons we chose them,'' he said. Nymex has ended a three-year-long partnership with the Chicago Mercantile Exchange, which had been listing Nymex's e-miNY crude oil futures contract on its Globex electronic system. --Editor: Dieterich. Story illustration: For news on exchanges, see {NI EXC }. To graph Nymex crude oil futures over the past year, see {CL1 GPO D }. For more oil stories, see {OTOP }. To contact the reporter on this story: Ann Saphir in Chicago at (1) (312) 443-5942 or asaphir@bloomberg.net; Matthew Leising in New York at (1) (212) 617-1151 or mleising@bloomberg.net. To contact the editor responsible for this story: Robert Dieterich at (1) (212) 617-4485 or rdieterich@bloomberg.net. [TAGINFO] 78948Z US CN ICE US CN 17757Z US CN NI NRG NI CMD NI OIL NI GAS NI CRUDE NI OILPROD NI EXC NI NYMEX NI US NI MNA NI SCR NI GASOLINE NI IPE NI LBO NI IPO #<141602.831928># -0- Oct/12/2005 10:53 GMT