New York Mercantile Exchange (NYMEX)
New York-based commodity futures exchange
New York-based commodity futures exchange
The New York Mercantile Exchange (NYMEX) is a commodity futures exchange located in Manhattan, New York City. It is owned by CME Group, one of the largest futures exchanges in the world, that also runs the Chicago Mercantile Exchange and Chicago Board of Trade. The NYMEX has offices in other U.S. cities such as Boston, Washington DC, and San Francisco. Other global NYMEX offices are in Dubai, Tokyo, and London.
The NYMEX is comprised of two divisions, the New York Mercantile Exchange and the Commodities Exchange Inc. (COMEX). These two divisions were previously separate entities owned by NYMEX Holdings Inc. NYMEX Holdings Inc. was acquired by CME Group for $11.8 billion in cash and stock, with the acquisition completed in August 2006. The NYMEX division handles billions of dollars worth of futures and options contracts for energy products such as oil and natural gas, while the COMEX division handles trading of metals like gold, aluminum, silver, copper, and the FTSE 100 index options.
Commodity exchange markets started in the 19th century when farmers and businessmen formed forums to make it easier to buy and sell commodities. By the late 19th century, there were more than 1,600 commodity marketplaces. The NYMEX started when a group of butter and cheese farmers formed the Butter and Cheese Exchange of New York in 1872. The exchange was later expanded to include eggs, and the name changed to the Butter, Cheese and Egg Exchange. A decade later, the market opened trade in canned goods, poultry, and dried fruits, and the name changed again to the New York Mercantile Exchange.
With the construction of centralized warehouses in the main business centers in Chicago and New York, smaller exchanges in other cities began to disappear while large exchanges like the NYMEX got more business. COMEX, the second division of NYMEX, was established in 1933 after four small exchanges merged. These exchanges included the Rubber Exchange of New York, the National Metal Exchange, the National Raw Silk Exchange, and the New York Hide Exchange.
There were a lot of trades in futures of Maine’s potato crop, one of the leading commodities traded on the exchange. According to “The Asylum”, by Leah McGrath Goodman, there was open manipulation by exchange traders and potato inspectors in the market. However, this was little known until the 1970s when the biggest potato scandal happened. J.R. Simplot, the Idaho potato magnate, shorted potato futures in large numbers, leaving a large number of contracts pending at the expiration date and resulting in many defaulted delivery contracts. After a public outcry and public hearings by the newly created Commodity Futures Trading Commission (CFTC), the NYMEX was barred from trading in potatoes or even trading in new commodities that it had not offered before.
The potato bust tarnished the reputation of the NYMEX, and for a time not many traders were willing to risk trading on the exchange. The NYMEX President, Richard Leone, brought in John Treat, a White House energy advisor to President Carter and President Reagan, to help restore the credibility of the exchange and to assist it in getting permission to offer trading in energy futures. Treat collaborated with Michael Marks, the new NYMEX chairman, and economist Arnold Safer to strategize on how to acquire the heating oil futures contracts that had just been deregulated by the government. The NYMEX became the first commodity exchange to offer heating oil futures trading in 1978, targeting small-scale suppliers from the northern United States. The oil futures became a hit during the energy boom as traders became millionaires and the NYMEX became larger and wealthier.
From the 1970s until the 1990s, the NYMEX, COMEX, and other exchanges shared trading floors at the World Trade Center. In 1994, the New York Mercantile Exchange and the Commodities Exchange Inc. merged under the NYMEX name. The trading floor was not large enough to accommodate the huge number of the exchange’s employees, so it relocated to the World Financial Complex in southwest Manhattan in 1997.
Four years later, the old New York Mercantile Exchange (NYMEX) offices at the World Trade Center were destroyed in the September 11 terror attacks. The new NYMEX offices were mostly undamaged, so the exchange was able to resume trading within a short time. The headquarters of the New York Board of Trade (NYBOT) were completely destroyed in the attacks, and the board signed a lease agreement with the exchange to move into their trading facility at the World Financial Center. To protect against future attacks on its premises, the NYMEX built a trading floor backup facility outside of New York City. The $12-million backup facility is equipped with 700 trader’s booths, 2,000 telephones, and a computerized backup system.
Trading on the New York Mercantile Exchange (NYMEX) was initially based on the open outcry trading system until 2006. The open outcry system is a method of communication between professionals in a futures exchange or stock exchange, and it involves shouting and using hand signals to transfer information on buy and sell orders. Bids and offers are made in the open market, therefore giving participants a chance to compete for orders and try to get the best prices. The NYMEX open outcry traders were against the phasing out of outcry system to pave the way for electronic trading because such a change would render them jobless. But since the exchange was already facing competition from electronically-based exchanges, it had to adopt electronically-based trading systems to remain competitive.
In September 2006, the NYMEX teamed up with the Chicago Mercantile Exchange (CME) and started using the CME’s Globex electronic trading platform. As a result, many floor traders were eliminated as banks, hedge funds, and oil companies stopped sending representatives to the NYMEX trading pits and instead started trading electronically through computers. By September 2007, the electronic volume on the CME Globex trading platform was 770, 000 daily contracts, a 178% increase over the September 2006 CME Globex volume. The COMEX division electronic trading volume on CME Globe averaged 121, 000 contracts daily by September 2007, representing a 1,396% increase over the 8,090 daily contracts recorded on the CME Globex platform in September 2006. In December 2016, the NYMEX shut down its open outcry trading floor in lower Manhattan in a significant step towards completely embracing electronic trading.
Advance your career in investment banking, private equity, FP&A, treasury, corporate development and other areas of corporate finance.
Enroll in CFI’s Finance Courses to take your career to the next level! Learn step-by-step from professional Wall Street instructors today.