Chicago Mercantile Exchange Holdings (CME)/Nymex Holdings

 
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NYMEX Holdings (NMX) was the holding company for the New York Mercantile Exchange (NYMEX), the world’s largest physical energy commodities futures exchange, and Commodity Exchange (COMEX), a separate metal commodities exchange. In mid-2008 the company was acquired by Chicago Mercantile Exchange Holdings (CME). NMX's headquarters in New York City, in addition to its branches in Houston, Washington, D.C., London, and Hong Kong, provide a physical market space for buyers and sellers of futures and options. These contracts give a commodity buyer an obligation or a choice, respectively, to purchase a product at a time in the future at a specified price.

Commodity prices are set in the process of open trading, and the NYMEX serves as a regulatory body to ensure that both parties in each trade follow through with their obligations. The company makes money by charging transaction fees and providing proprietary market data and analysis.

The NYMEX is one of the few remaining mercantile exchanges to use the open outcry system, where traders shout and gesture to communicate on the trading floor. Participants in the market can also trade electronically when the trading floor is closed. NMX's adoption of electronic trading is expected to greatly increase NMX's business volume, as trading is no longer limited to the standard workday. The company also stands to benefit from continued volatility in the prices of crude oil, as rapidly changing prices correlate with greater trading activity.

Business Financials

NYMEX Holdings acts as a clearinghouse for buyers and sellers and is the counter-party to each exchange, meaning that it pays the seller and is paid by the buyer. This policy reduces the risk that either party is hurt by the other party defaulting on a contract, which contributes to price liquidity and market transparency. Revenue comes from fees that NYMEX Holdings collects for clearing and transaction services. In addition, NYMEX Holdings sells proprietary market and futures data to outside parties, revenue from which has reached $63.6 million in 2006.[4]

As of June 2007, the NMX balance sheet is very tight, with over $557 million in cash on the books, or about $6 per share, offset by only $80 million in long-term debt. CME has a larger cash pile, of just over $1 billion, with $164 million in debt.

In 2006, NYMEX and COMEX together were the largest physical commodity futures exchange in the world and the third largest futures exchange in the United States by contract volume. 98.1 million light sweet crude oil contracts and 21.1 million gold contracts out of 294.8 million total were traded, making it one of the most liquid exchanges in the world as well.[5] Increased interest in futures and options, increased price volatility in energy, particularly oil, and technological advances have all contributed to the trading volume on the NYMEX.

Clearing and transaction fees accounted for $419.7 million of the revenue, up 50% from 2005. This increase was caused mainly by increased trading volume and new electronic volume from NYMEX’s electronic trading platform. Global demand for crude oil and perpetual uncertainty of oil supplies due to political upheaval in oil producing countries contributed to the volatility of the crude oil futures market, which then led to more transactions being made.[6] Even more impressively, net income increased by 118% from 2005.[7] NMX's operating expenses increase very slowly since the greater part of growing expenses directly result from increased transaction volume.

Trading volume on COMEX increased by 4% from 2005, due to the weakened U.S. dollar and increased interest in silver as an alternative to investing in gold.[8] NMX’s strategies for growth include developing new products, diversifying the services it offers, and geographically expanding its customer base. In 2006, NMX began handling contracts for coffee, sugar, cocoa, cotton, and orange juice, which are classified as “soft” commodities, in addition to metals and energy, and also plans to expand its off-exchange clearinghouse business. In Europe and Asia, NMX provides an electronic trading platform through a partnership with the Chicago Mercantile Exchange.

Trends and Forces

  • Fluctuations in commodity prices: trading volume is driven by price volatility, and energy commodities, which are NMX’s most important products, depend on weather conditions, political conditions in supplier nations, and supply and demand based on public perceptions. In particular, political instability in major oil produces countries contributes to the high price volatility of crude oil, which just recently hit $100 a barrel.[9] Any reduction in price volatility may slow trading activity and liquidity, which may further discourage market participants and hasten the decrease in trading volume. However, adverse political conditions to the point of cutting the supply of oil and other commodities altogether will also reduce the liquidity of the futures market and may also affect NMX’s revenues.
  • NMX moves into the future with electronic trading: In 2006 NMX finally began offering an electronic trading platform. Electronic trading represents a large source of potential revenue because it allows NMX's clients to trade after normal business hours. It also fills an important hole in the company's product offering.
  • Acquisition Target:Consolidation in the exchanges is rampant. It is possible that NMX will merge with another exchange; for instance, rumors of an NMX-NYSE merger have been quashed many times in recent years. Currently, NMX is the subject of a merger bid from the Chicago Mercantile Exchange Holdings (CME)

Competition

Other commodities exchanges worldwide that offer energy and metal products include:

Company Contracts Traded (millions)
Chicago Mercantile Exchange1300 [10]
Intercontinental Exchange92.7 [11]
London Metal Exchange86.9 [12]
NYMEX Holdings295 [13]
Shanghai Futures Exchange58.1 [14]
Tokyo Commodity Exchange63.7 [15]

NMX faces significant competition from domestic and foreign exchanges, particularly those subject to less regulation. Some exchanges such as the Chicago Mercantile Exchange offer a wider range of products, while others, particularly those in rapidly developing parts of Asia, have a geographical advantage over NMX as it expands its customer base. NMX’s competitive advantages include a reputation for reliability and transparency and its proprietary market data and other intellectual property.




References

  1. 2006 NMX 10-k, Item 6, pg. 36
  2. 2006 NMX 10-k, Item 7, pg. 43
  3. 2006 NMX 10-k, Item 7, pg. 43
  4. 2006 NMX 10-k, Item 1A, pg. 22
  5. 2006 NMX 10-k, Item 1, pg. 2
  6. 2006 NMX 10-k, Item 7, pg. 42
  7. 2006 NMX 10-k, Item 7, pg. 40
  8. 2006 NMX 10-k, Item 7, pg. 43
  9. "Oil hits record $100 a barrel," CNN
  10. "December Trading Volume at CME Rises," Yahoo Finance
  11. Intercontinental Exchange Press Release Jan. 3, 2007
  12. London Metal Exchange Press Release Jan. 5, 2007
  13. 2006 NMX 10-k, Item 7, pg. 40
  14. New South Wales Department of State and Regional Development
  15. New South Wales Department of State and Regional Development
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