E-trading’s Dominance Affirmed
December 4th, 2006 by Justin
Nowhere is the move from floor-traded exchanges to electronic trading more obvious than on the NYMEX, the New York Mercantile Exchange. In the past, and especially leading up to that exchange’s recent IPO, seat prices–which gave the owner the right to trade on the exchange’s floor along with voting right and partial ownership–were the best way to track the value of trading on the floor in markets such as crude oil and natural gas.
Rather than purchasing a seat outright, traders will often lease seats from their permanent owners and try their hand at the risky, arm-flailing business of trading in one of the last and largest pits on the planet. Leasing cost $20000 per month in November, but since then a new change has taken place (though overshadowed by the blistering IPO which more than doubled on the first day of trading): the NYMEX introduced electronic trading on the CME’s Globex platform side-by-side with its pit trading.
In the weeks since, e-trading quickly overtook pit trading, so that:
On screen Nymex now records more daily trades than in its pits. Yesterday, 443,091 Nymex contracts changed hands on Globex, compared with 407,721 floor trades, exchange data show.
The necessity of spending 20 grand per month for the chance at making a market in crude oil no longer exists. Would-be liquidity providers can now do the same free of charge on Globex, or bid and offer on the competition’s electronic platform (ICE).
The final nail in the coffin of pit trading: the market itself. The price for a one-month lease in the crude oil pits has plummeted along with pit trading’s share of the volume, so that leases starting last Friday sold for only $5000 (a decrease of $20000).
