Comex May Block Nymex Plan to Expand Electronic Trading of Gold 2006-05-19 14:10 (New York) By Ann Saphir and Matthew Leising May 19 (Bloomberg) -- Nymex Holdings Inc. may be unable to expand electronic trading of gold futures as planned at its Comex metals unit because traders who control the exchange fear losing sales to a growing rival, the Chicago Board of Trade. ``Comex traders are not aggressively seeking to do away with the way they do business down here,'' said Kevin Grady, a Man Financial Inc. metals trader and a member of the governor's committee at Comex, the world's largest gold and silver market. Nymex, the world's largest energy market, acquired the auction-style metals exchange in 1994 in a deal that gave 712 Comex members final say over any decision to offer electronic trading during the day. Chief Executive James Newsome is hoping to win approval for such trades as he prepares to offer Nymex energy contracts at the Chicago Mercantile Exchange. Comex traders are ``comfortable'' relying on face-to-face transactions and are in no hurry to allow electronic trades that bypass them, especially after trading surged this year to a record because of soaring metals prices, Grady said. ``I've been down here 22 years and this is the busiest we've been,'' he said. The rival Chicago Board of Trade has captured 37 percent of the $8.5 billion-a-day U.S. market for gold futures since it started offering the contracts in October 2004. The exchange handled 540,000 contracts, each for 100 ounces of gold, this month through May 17. Comex handled 1.1 million contracts. Futures are agreements to buy or sell assets at a set date and price; options are the right to do so. Traders use them to bet on or guard against changes in the price of the underlying asset. Ending Limits Nymex, which has always banned electronic trading while its trading pits were open, is ending those limits after losing its share of the market for energy products such as oil and gasoline to the all-electronic ICE Futures in London. ICE, owned by Intercontinental Exchange Inc., has captured about 30 percent of all U.S. oil futures contracts. An electronic market allows traders to instantly know the cost of their transaction. By contrast, customers phoning their orders to the floor of an exchange must wait while brokers seek the best prices in the exchange pit. Starting June 11, Nymex will offer electronic versions of its energy contracts on the Chicago Merc's Globex system, which operates nearly 24 hours a day. Those contracts will be cash- settled, with physically delivered contracts to be offered on Globex later this year. The New York exchange wants to do the same with metals contracts in a bid to build business as it prepares for an initial public offering later this year. Reluctant Traders Comex floor traders are probably reluctant to make it easier for other people to make money from their contracts, said Craig Pirrong, director of energy markets at the University of Houston's Global Energy Management Institute. Blocking expanded electronic trading ``might be somewhat shortsighted because of the steady gain the Board of Trade has made,'' Pirrong said. ``The way they can ease the pain would be to get a chunk of that revenue from these contracts trading on Globex.'' With about 65 percent of its trading conducted face to face, the New York bourse is an exception in the $4.5 trillion- a-day global futures market, where electronic trading dominates. Europe's largest futures markets, Frankfurt-based Eurex AG and London-based Euronext.liffe, are fully electronic; the Board of Trade and its bigger rival the Chicago Merc routinely handle more than 70 percent of their business electronically. Bottled Up ``As volumes pick up, open outcry markets have a tendency to get bottled up,'' said David Meger, director of metals trading at Chicago-based Alaron Trading. ``That makes the electronic marketplace at the CBOT very attractive.'' Managers in the $1.2 trillion hedge-fund industry prefer the speed of an electronic market, traders such as R.F. Lafferty's Marty McNeill said. Hedge funds ``have no allegiance to either the CBOT or the Comex; it's just where they can make the biggest buck,'' said McNeill, who is based in New York. ``It's quicker to go to the CBOT than to go to the floor'' of the Comex, he said. Because hedge funds and other large customers continue to trade at Comex, members aren't worried about competition, Grady said. Daily trading in gold futures has risen 70 percent since December, figures from the two exchanges show. ``They have a large piece of the pie, but the pie is getting bigger,'' Nymex spokeswoman Anu Ahluwalia said. Need Incentive ``In order for Comex to give up the pit and go to side by side, there would need to be a very good incentive,'' Grady said. Nymex may try to buy Comex members' electronic trading rights for a stake in its IPO, he said. Electronic daytime trading at the Comex would come too late to dislodge the Chicago market's foothold, said Robert Ray, the Board of Trade's director of product development. ``Eventually one market will become more dominant,'' Ray said. The Chicago exchange has failed four times since 1974 to build a market in gold futures. Many Comex members are betting it will fail again. Traders have about 28,000 contracts open at the Board of Trade. Comex has 332,000 contracts of so-called open interest. ``If their open interest was 100,000, I'd be nervous,'' said Billy Flahive, a gold trader and partner at Island Trading Group in New York. ``The business is going to stay with us because we have the liquidity.'' --With reporting by Pham-Duy Nguyen in Seattle. Editor: Stroth. Story illustration: See {BOT US GPO } for a graph of CBOT shares. See {NI DRV for more stories on derivatives. To look up futures contracts, click on {CTM }. For CBOT gold contracts see {ZPA CT }. To chart Comex gold prices in the past year, see {GC1 GP D }. To contact the reporters 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 editors responsible for this story: Steve Stroth at (1) (312) 443-5931 or sstroth@bloomberg.net; Robert Dieterich at (1) (212) 617-4485 or rdieterich@bloomberg.net. 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