New York Mercantile Exchange

New York Mercantile Exchange (NYMEX)

7 min read

Have you heard of the New York Mercantile Exchange? There are quite a few exchanges to choose from when it comes to trading. The NYMEX is a commodities futures exchange where you can access many commodities trading on its exchange. 

The New York Mercantile Exchange handles billions of dollars worth of oil transactions, energy carriers, metals, and other commodities bought and sold on the trading floor, and the overnight electronic trading computer systems for future delivery. The prices quoted for transactions on the exchange are the basis for prices people pay for various commodities worldwide.

September 11, 2001: I can remember that day like yesterday, and I’m sure you can too. Four years later, terrorists destroyed the old NYMEX offices at the World Trade Center. Luckily, the new NYMEX offices were mainly unimpacted, so trading on the exchange resumed quickly. 

New York Mercantile Exchange Example

The New York Mercantile Exchange is a commodity futures exchange based in Manhattan. The NYMEX division sees billions of dollars worth of futures and options contracts flow, specifically for energy products such as oil and natural gas. For those of you not familiar with commodities or what a commodities exchange is, let’s go for a walk down memory lane. 

First and foremost, most commodities traded worldwide include everything from agricultural products to raw materials. Notably, wheat, barley, sugar, cotton, cocoa, coffee, milk products, pork bellies, oil, and metals, to name a few. 

And where are they traded? Well, on various commodities exchanges around the world. You can’t exactly show up with 1000 barrels of oil or 1000 L of milk hoping to make a sale; that would be ridiculous.

Instead, you have a few choices to trade your 1000 barrels of oil. You can trade derivatives contracts, forwards, futures and options, and spot trades for those looking for immediate delivery.

Offices

From the 1970s to the 1990s, the World Trade Center hosted the trading floor for the NYMEX, COMEX, and other exchanges for thirty years. In the 1970s, COMEX, NYMEX, and other exchanges shared a single trading floor in the World Trade Center. For thirty years, they traded like this, and interestingly enough, this floor was depicted in the 1980s film Trading Places!

The floor was shared between these exchanges, and as you can imagine, the room was tight. As a result, the exchange relocated in 1997 to the Financial Complex in southwest Manhattan. 

Who Owns the New York Mercantile Exchange?

CME Group, the world’s leading derivatives marketplace, owns the NYMEX. In addition to the NYMEX, they also run the Chicago Mercantile Exchange and Chicago Board of Trade. They’re a global leader with offices in places such as Dubai, Tokyo, London, Boston, and San Francisco. 

Now, it’s interesting to point out that the origins of the NYMEX date back to the 1800s. During this time, farmers and business people gathered in forums to make trading their commodities easier. And it didn’t take long for these forums to take off. By the late 1800s, there were over 1,600 commodity marketplaces.

Interestingly enough, in 1872, the NYMEX was started with a group of butter and cheese framers. Called the Butter and Cheese Exchange of New York, it later expanded to include eggs. Ten years later, canned goods, poultry, and dried fruits entered the picture. Consequently, the name was changed again to the New York Mercantile Exchange.

Fifty years later, the second division of NYMEX, COMEX, was established. The New York Rubber Exchange, the National Metal Exchange, the National Raw Silk Exchange, and the New York Hide Exchange were within this division.

As time went on, smaller exchanges in other cities began to disappear. This was due to the construction of centralized warehouses in the central business centers in Chicago and New York, resulting in larger exchanges like the NYMEX getting more business. 

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Divisions of the New York Mercantile Exchange

A quick Google search shows that the NYMEX has two divisions: the New York Mercantile Exchange and the Commodities Exchange Inc. (COMEX). For reference, the COMEX division oversees metals, such as gold, silver, and copper, and FTSE 100 index options trading.

Previously, the two divisions were separate entities owned by NYMEX Holdings Inc. However, in 2006, CME Group coughed up $11.8 billion in cash and stock to buy the whole thing. 

1. NYMEX Division

  • Coal
  • Electricity
  • Gasoline
  • Crude Oil
  • Heating Oil
  • Natural gas
  • Propane
  • Uranium

2. COMEX Division

Floor of the NYMEX

Did you know that the Commodity Futures Trading Commission regulates the floor of the NYMEX? Hence, every company that wants to trade on the exchange must send their independent broker.

Because of this, you’ll see one company represented by multiple exchange employees. The only role of these employees is to record transactions; they have nothing to do with buying and selling. 

Trading Platforms

Even though the NYMEX went electronic primarily in 2006, they maintained a small “pit,” practicing the open outcry trading system.

Within the pit was a complex set of hand gestures and shouting by traders on the physical trading floor. Through this outcry trading system, they placed their buy and sell orders.

However, you’ll be disappointed if you head to NYC and hope to see the pit as the NYMEX closed it permanently.

Because of shrinking volume, the exchange needed to adopt electronically-based trading systems. Additionally, to remain competitive, the pit’s closure came at the end of trading on Friday, December 30, 2016. 

Electronic Trading Networks

Undoubtedly, the New York Mercantile Exchange had a virtual monopoly on “open market” oil futures trading. But, when electronically-based exchanges entered in 2000, the game changed.

So, it should be no surprise that they started to take away the business of the open outcry markets like NYMEX.

As expected, many floor traders’ jobs were lost when companies started trading electronically. Understandably, NYMEX pit traders didn’t support ECNs as they threatened their livelihood.

But it didn’t matter; executives at NYMEX felt that electronic trading was the only way to keep the exchange competitive. 

And it worked. NYMEX teamed up with the Chicago Mercantile Exchange (CME) and started using the CME’s Globex electronic trading platform.

As a result, banks, hedge funds, and substantial oil companies stopped making telephone calls to the pits and started trading directly for themselves.

Final Thoughts

By September 2007, the electronic volume on the CME Globex trading platform soared. In just one short year, there was a 178% increase in trading over the September 2006 CME Globex volume, totaling 770,000 contracts.

Another shocking statistic is the increase in trading volume within the COMEX division. For example, electronic trading volume on CME Globe averaged 121,000 contracts daily by September 2007. This might not seem a lot, but it’s a 1,396% increase over the 8,090 daily contracts recorded on the CME Globex platform the year prior. 

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