Nymex Regains Throne In Energy Trading
BY MARILYN ALVA
INVESTOR'S BUSINESS DAILY
Posted 12/19/2006
Talk about comebacks. In a matter of months, Nymex Holdings (NMX) went from a market share leader to a market share loser and then back again as king of energy futures trading.
Exchanges of all kinds are hot these days, and Nymex,which runs the New York Mercantile Exchange, is no exception.
Since it went public in November, shares have soared tenfold. Its market cap of nearly $11 billion is higher than many household-name firms.
Interest in the stock has to do with investors' penchant for exchanges in general and the company's specialization in energy and metals future trading.
Energy in all its forms is a $4 trillion global market and is growing about $10 billion a year, says Peter Fuscaro, chairman of energy consulting firm Global Change Association and head of the Energy Hedge Fund Center.
"It's the largest business in the world, and most people don't hedge," he said. With hedge funds flooding in, that's changing, he says.
Nymex was created by dairy merchants in 1872 to trade butter and cheese. After it started trading heating-oil futures in 1978, it eventually became the world's largest energy futures exchange.
But suddenly in February its dominance was shaken when IntercontinentalExchange, (ICE) known as ICE, launched an all-electronic energy exchange that horned in on Nymex's prized contracts in West Texas intermediate crude oil.
ICE iced Nymex's growing share of the energy futures market, which was largely done the old-fashioned way by traders yelling on the exchange floor. Nymex's market share dropped while ICE's rose.
Meanwhile, Nymex's smaller metals business, the floor-based Comex, was getting kicked around by the Chicago Board of Trade's (BOT) electronic platform.
Things looked really bad for Nymex when the Chicago Mercantile Exchange (CME) known as the CME prepared to launch an energy trading business on its own robust electronic Globex platform.
"That's when I thought Nymex was really doomed," said Michael Gorsham, professor and director of the Center for Financial Markets at the Illinois Institute of Technology. "CME is an incredibly powerful derivatives exchange."
Nymex had a small, inferior electronic system compared with Globex. But even as it stubbornly stuck with a floor-based business model, it had developed good relations with players in crude oil and natural gas. And it became good at managing the business.
In April, the two negotiated a deal. Nymex would use CME's Globex platform to trade energy futures and CME would get a foothold in the business without having to start its own.
The deal made all the difference. Nymex quickly regained lost market share after it started offering energy trades on Globex in late Spring. Nymex recently started using Globex for trading in metals such as gold and silver as well.
By October, Nymex held 56% of the electronics market in energy futures contracts. With floor trades counted in, it has about a 70% share.
In client reports, analyst Robert Rutchow of Prudential Equity Group advises caution. He writes that although Nymex "is in the sweet spot of exchanges" with its energy and metals products, it faces more direct competition than any other derivatives exchange.
Fusaro answers naysayers this way: "They don't understand the growth trajectory. I think it's undervalued, frankly."
Still, even Rutschow told clients that ICE will continue to lose market share to Nymex due to the far larger scale of the Globex platform.
Overall volume trading in energy for both firms continues to grow. Hedge funds and investment banks, among others, are spurring growth "and Nymex is benefiting from a lot of this," Fuscaro said.
As large as the overall energy market is, oil futures trading still has a relatively small footprint compared with other types of derivatives trading such as corn and wheat.
But energy prices oil especially are among the most volatile of any commodity and volatility drives trading volume. Hedge funds see that volatility as opportunity.
"If energy prices were just a flat line on a graph that would hurt Nymex," Gorsham said. "But I don't know a single soul in the world who believes we're headed there."
Fuscaro's Energy Hedge Fund Center started tracking energy hedge funds in 2004. The center counted about 180 such funds then, most in the U.S. and Europe.
Now they number 530 "and more are coming next year," Fuscaro said.
Meanwhile, exchanges of all stripes are acquiring each other. The CME, for one, plans to acquire the Chicago Board of Trade, or CBOT. They're the top two futures exchanges in general; their merger would give the combined entity 90% of the futures market, Gorsham says. The Justice Department is scrutinizing the pending merger.
Nymex is less likely to be a takeout target now that it has business ties to the CME, industry watchers say. The CME would be the most likely buyer, but it has its hands full with its pending buyout of CBOT.
Nymex's chairman has expressed an interest in buying ICE, which in turn is trying to merge with the New York Board of Trade. A Nymex spokeswoman says the company is not talking with anyone at this time.
Nymex's third-quarter earnings grew 82% over the same time a year earlier to 51 cents a share. Revenue in the quarter rose 45% to $142.4 million.
Rutschow estimates full-year earnings will reach $1.87 a share, up from 97 cents last year. His forecast calls for earnings of $2.95 next year and $3.75 in 2008.
BY MARILYN ALVA
INVESTOR'S BUSINESS DAILY
Posted 12/19/2006
Talk about comebacks. In a matter of months, Nymex Holdings (NMX) went from a market share leader to a market share loser and then back again as king of energy futures trading.
Exchanges of all kinds are hot these days, and Nymex,which runs the New York Mercantile Exchange, is no exception.
Since it went public in November, shares have soared tenfold. Its market cap of nearly $11 billion is higher than many household-name firms.
Interest in the stock has to do with investors' penchant for exchanges in general and the company's specialization in energy and metals future trading.
Energy in all its forms is a $4 trillion global market and is growing about $10 billion a year, says Peter Fuscaro, chairman of energy consulting firm Global Change Association and head of the Energy Hedge Fund Center.
"It's the largest business in the world, and most people don't hedge," he said. With hedge funds flooding in, that's changing, he says.
Nymex was created by dairy merchants in 1872 to trade butter and cheese. After it started trading heating-oil futures in 1978, it eventually became the world's largest energy futures exchange.
But suddenly in February its dominance was shaken when IntercontinentalExchange, (ICE) known as ICE, launched an all-electronic energy exchange that horned in on Nymex's prized contracts in West Texas intermediate crude oil.
ICE iced Nymex's growing share of the energy futures market, which was largely done the old-fashioned way by traders yelling on the exchange floor. Nymex's market share dropped while ICE's rose.
Meanwhile, Nymex's smaller metals business, the floor-based Comex, was getting kicked around by the Chicago Board of Trade's (BOT) electronic platform.
Things looked really bad for Nymex when the Chicago Mercantile Exchange (CME) known as the CME prepared to launch an energy trading business on its own robust electronic Globex platform.
"That's when I thought Nymex was really doomed," said Michael Gorsham, professor and director of the Center for Financial Markets at the Illinois Institute of Technology. "CME is an incredibly powerful derivatives exchange."
Nymex had a small, inferior electronic system compared with Globex. But even as it stubbornly stuck with a floor-based business model, it had developed good relations with players in crude oil and natural gas. And it became good at managing the business.
In April, the two negotiated a deal. Nymex would use CME's Globex platform to trade energy futures and CME would get a foothold in the business without having to start its own.
The deal made all the difference. Nymex quickly regained lost market share after it started offering energy trades on Globex in late Spring. Nymex recently started using Globex for trading in metals such as gold and silver as well.
By October, Nymex held 56% of the electronics market in energy futures contracts. With floor trades counted in, it has about a 70% share.
In client reports, analyst Robert Rutchow of Prudential Equity Group advises caution. He writes that although Nymex "is in the sweet spot of exchanges" with its energy and metals products, it faces more direct competition than any other derivatives exchange.
Fusaro answers naysayers this way: "They don't understand the growth trajectory. I think it's undervalued, frankly."
Still, even Rutschow told clients that ICE will continue to lose market share to Nymex due to the far larger scale of the Globex platform.
Overall volume trading in energy for both firms continues to grow. Hedge funds and investment banks, among others, are spurring growth "and Nymex is benefiting from a lot of this," Fuscaro said.
As large as the overall energy market is, oil futures trading still has a relatively small footprint compared with other types of derivatives trading such as corn and wheat.
But energy prices oil especially are among the most volatile of any commodity and volatility drives trading volume. Hedge funds see that volatility as opportunity.
"If energy prices were just a flat line on a graph that would hurt Nymex," Gorsham said. "But I don't know a single soul in the world who believes we're headed there."
Fuscaro's Energy Hedge Fund Center started tracking energy hedge funds in 2004. The center counted about 180 such funds then, most in the U.S. and Europe.
Now they number 530 "and more are coming next year," Fuscaro said.
Meanwhile, exchanges of all stripes are acquiring each other. The CME, for one, plans to acquire the Chicago Board of Trade, or CBOT. They're the top two futures exchanges in general; their merger would give the combined entity 90% of the futures market, Gorsham says. The Justice Department is scrutinizing the pending merger.
Nymex is less likely to be a takeout target now that it has business ties to the CME, industry watchers say. The CME would be the most likely buyer, but it has its hands full with its pending buyout of CBOT.
Nymex's chairman has expressed an interest in buying ICE, which in turn is trying to merge with the New York Board of Trade. A Nymex spokeswoman says the company is not talking with anyone at this time.
Nymex's third-quarter earnings grew 82% over the same time a year earlier to 51 cents a share. Revenue in the quarter rose 45% to $142.4 million.
Rutschow estimates full-year earnings will reach $1.87 a share, up from 97 cents last year. His forecast calls for earnings of $2.95 next year and $3.75 in 2008.
