November/December 1994
What does the merger between Nymex and Comex mean for the metal-trading world, and what lies ahead for this new entity? Nymex President R. Patrick Thompson offers some answers.
By Si Wakesberg
Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.
When the New York Mercantile Exchange (Nymex) and the Commodity Exchange Inc. (Comex) merged this summer, they created what one international metals publication called "a force to be reckoned with in global commodities trading."
Indeed.
The Aug. 3 wedding of Nymex and Comex has produced a new exchange "superpower"--reportedly the world's largest physical commodity futures exchange, the third-largest futures and options exchange in the United States, and the largest commodities exchange in New York City.
Under the terms of the merger agreement, Comex--the world's biggest precious metals exchange, with expertise in gold and silver, and copper to boot--has become a wholly owned subsidiary of Nymex, the preeminent exchange for platinum, palladium, and energy-related commodities such as crude oil, gasoline, and natural gas. The deal also provides for distributions to Comex members of $42 million up front and an additional $20 million over the next four years, with Nymex seat owners and lessees receiving $22 million.
At the time of the signing, Nymex Chairman Daniel Rappaport called the merger "one of those watershed events that occurs once in a generation," asserting that the marriage will "bring greater efficiency and strength to the New York futures industry."
The Nymex-Comex merger will also certainly bring changes to their corners of the futures trading universe, as well as to the unified exchange itself. In an interview withScrap Processing and Recycling, Nymex President R. Patrick Thompson talks about the advantages of the merger and what changes metal traders can expect from the newly merged organization in the next few years.
Why Merge?
For Nymex, the recent merger with Comex seems to have been a business marriage made in heaven. First off, Thompson notes, the merger essentially doubled Nymex's membership base, adding Comex's 768 members to its existing 816 members.
The merger also boosted Nymex's annual trading volume by at least a third virtually overnight, adding Comex's 1993 trading volume of 18.8 million contracts to its own 55.4 million. In 1994, the combined exchange is expected to handle approximately 81 million futures and options contracts, with Comex accounting for 22 million of that total and Nymex the remaining 59 million.
Another benefit of the Nymex-Comex merger is the consolidation of operations and technology it's provided--thus, reducing the exchange's operating costs. Part of this process--expected to take two years and save $6 million annually--involves the exchange's recently announced move from its current, cramped quarters at the World Trade Center to new offices in Battery Park City in lower Manhattan. "We're building a new home for Nymex from the ground up," says Thompson, noting that the move is slated to occur in 1997.
To discourage Nymex from moving to New Jersey, New York City and the state of New York offered incentives to Nymex totaling close to $185 million in the form of a capital contribution of $125 million and sales and mortgage tax abatements. Nymex's decision to remain in New York City means the 8,100 jobs in the two exchanges and the $177.5 million in annual city and state revenues will remain in New York.
In addition, acquiring the metal commodities handled by Comex will strengthen Nymex's platinum and palladium trading facets, as well as open up broader diversification opportunities for it, Thompson says, remarking, "It gives Nymex greater strength and opportunities to expand into other fields."
Building a Better--and Broader--Metals Exchange
Nymex is certainly wasting no time sketching out plans to expand into other fields. The exchange, in fact, is already entertaining the idea of offering an aluminum contract---focused on U.S. delivery, with the possibility of U.S. warehouses--as well as an electricity futures contract. Some study is also going forward on the long-debated concept of steel scrap futures trading, but it is not high on the agenda, Thompson notes
Why an aluminum futures contract, especially in light of Comex's failed attempt to establish such a contract between 1983 and 1990? Thompson admits that Comex's past experience "will make Nymex approach the matter more cautiously." In fact, he expects a six-month research study into the feasibility of trading aluminum before a decision is reached. "We will discuss this with top aluminum industry officials, as well as brokers and traders, before we make any specific move in the direction of trading aluminum," he says.
As for the trading of other metals, Thompson remarks, "Nymex is not looking into zinc or nickel yet, although we have a mandate to look at all products."
In an effort to help make its metals contracts more successful, Thompson discloses that Nymex is planning to establish individual product metals advisory task forces this fall. "At Nymex," he states, "we want to bring the metals industry into the exchange," adding pointedly, "We want to build a cohesive group-including committees and industry units-so that our exchange can become part and parcel of the metals industry. If we can achieve that goal--and I believe we can--Nymex will pose a formidable challenge to the LME [London Metal Exchange]."
That comment raises the question: Does Nymex compete with other exchanges? Thompson doesn't think the word "compete" is accurate. Just as copper traders avail themselves of the arbitrage between London (LME) prices and New York City (Comex) prices, he explains, energy users have gone the arbitrage route between Nymex in New York City and the International Petroleum Exchange (London) or the Singapore Exchange.
Asked whether the LME's role in copper and other metals threatens the Comex commodities, Thompson agrees that the LME has made substantial strides in the past decade to ensure that it is regarded as a world metals exchange.
Aside from Nymex's business relationship with the LME, Thompson notes that Nymex has developed a cooperative relationship with the Chicago Mercantile Exchange, with the two working together on a number of projects and codeveloping both the clearing and trading systems of the two exchanges.
As for the Chicago Board of Trade--the world's largest commodity exchange--he says, "So far, we've had no specific relationship, but there may be a possibility in the future."
Expanding One's Access
In reviewing Nymex's current strengths, Thompson is particularly enthusiastic about the successful operation of the Nymex Access computerized trading system that the exchange recently installed for its energy and platinum futures.
Nymex Access is a pretrading and posttrading system that enables traders--primarily those located in New York City, Chicago, Houston, and London--to engage in off-hours trading between 4 p.m. and 8 a.m. This opportunity to trade after the market has closed helps "manage risk and gives the trader a decided advantage," Thompson reports.
Using a split computer screen, Nymex Access users can call up the following information: On the left side of the screen is a display of all contracts, by commodity, available for trading along with their bids, offers, and size. The left side also presents a view of all orders that are pending and not yet entered.
The right side of the screen shows the bids and offers in the spread market based on the underlying futures market. It also offers a summary of the opening and the high and low prices, as well as the volume of contracts. It displays the last settlement, last trade, and volume for each contract selected. The trader can also see, for each option selected, the bids, offers, and size of both puts and calls.
Thus far, Nymex Access has been “more successful than we dreamt it would be," Thompson declares. "The volume has been very good in the four hours after the exchanges close and the four hours before the trading floor opens. We are immensely satisfied with Nymex Access, and we may even reach a break-even point much sooner than we expected." This initial success, he adds, may be a good omen for eventual international participation.
And the exchange fully plans to expand Nymex Access to add metals futures contracts traded on Comex, possibly as early as the first quarter of 1995.
The success of Nymex Access is a reflection of an overall upsurge in exchange activity, says Thompson. "This year has been a record-volume year for our exchange," he says, noting that the exchange has been moving about 240,000 to 250,000 contracts a day--about 15 percent more than a year ago. And this growth follows on the heels of a similar 15-percent rise in volume that Nymex recorded in1993.
As Nymex has boosted its volume, the price of a seat on the exchange has similarly ratcheted higher to the point where, now, a seat can run as high as $555,000, Thompson acknowledges. A decade ago, the same seat cost only $60,000.
Thompson credits the upsurge in exchange activity to a resurgence in the domestic economy. The economy this year has improved perceptibly, he notes, and this has had a favorable effect on metal commodities. "All metals are looking up,” he says, pointing specifically to copper's rally on the Comex division and adding that he expects solid activity for all Nymex and Comex division commodities for the remainder of 1994.
In discussing the market, Thompson briefly touches on the remarkable growth of activity by so-called derivatives dealers on the exchanges. Swaps, over-the-counter options, and other forms of derivatives, he says, have become immensely popular and, in turn, are hedged through organized exchanges. In the future, there will be even greater use of exchanges to manage risk in derivatives trading, he says.
Thompson refutes claims, however, that commodity fund buying disrupts market stability, saying that fund buying may affect prices in the short term, but it can't alter market fundamentals in the long run. In the end, he says, "the market rests on the fundamentals of supply and demand."
Speaking of the long run, for the new Nymex that will mean continuing to mesh the strengths of two formidable institutions to make an even more formidable unified exchange. It won't be an easy task, but Thompson is confident it will be accomplished. As he concludes, "We are today poised to make Nymex a basic medium for trading Comex commodities, as we are already for energy futures."•
What does the merger between Nymex and Comex mean for the metal-trading world, and what lies ahead for this new entity? Nymex President R. Patrick Thompson offers some answers.