On CME's Move to London: Whatever You Do, Don't Mention the Merc
It's probably a good thing for the CME Group that their plans unveiled on Monday to set up a new European exchange bear almost no resemblance to a costly, failed effort by its New York unit to cross the Atlantic eight years ago.
In 2004, the New York Mercantile Exchange (NYMEX), at the time a hallowed, independently owned East Coast institution, jumped at the chance to extend its energy market domination to Europe as the continent's main oil exchange prepared to shut down its open-outcry trading floor, one of the last in London.
Its ambitions crumbled over the following two years as UK regulators proved in no hurry to greenlight a new exchange; traders proved unenthusiastic about working long days at a temporary trading floor in Dublin; and the efficiency of electronic trading proved too great to overcome.
After spending more than $20 million on subsidized trading perks alone, NYMEX pulled the plug on its European adventure.
The CME's strategy unveiled on Monday bears little in common with that of NYMEX, which it now owns. The CME is applying now with Britain's Financial Services Authority for approval to open a market trading currency futures in mid-2013, giving it plenty of lead time.
Most importantly, it plans to use its Globex electronic platform rather than seek to replicate its Chicago floor.
"When the Merc was going to London it was before everything had moved electronically. The IPE traders there wanted us to come and rescue them," said James Newsome, who was president of NYMEX at the time and is now a regulatory consultant.
"I didn't mind going over there to try to compete but doing so with an open-outcry model was the downfall."
While the differences are glaring, the NYMEX experience offers a cautionary tale on the relatively rare effort by an exchange to launch a greenfield operation abroad.
Until now, the CME has tended to form ventures or co-list products with local exchanges; ICE has tended to make big acquisitions. Deutsche Bourse's Eurex derivatives unit launched a U.S. exchange in 2004, but it shut within years.
CME Chief Executive Phupinder Gill sees no danger of repeating NYMEX's missteps.
"That was a different time, different circumstances, and the world has changed tremendously. We did not look at that as a 'lesson'," he told Reuters in an interview on Monday.
FROM NEW YORK TO DUBLIN TO LONDON...AND BACK AGAIN
The NYMEX hatched its European invasion plans in 2004, as the Atlanta-based IntercontinentalExchange prepared to shut down the trading floor of the International Petroleum Exchange (IPE), which it had bought in 2001.
While the closure of the floor at St Katherine's Dock was signaled years earlier, discontent among the dozens of London floor brokers swelled as a deadline was set, opening an opportunity for the NYMEX, which was still owned by its members -- most of them veterans of the raucous New York trading pit.
Because NYMEX couldn't gain immediate approval from the FSA, it launched trading in Brent crude -- a mirror image of the IPE's London-based contract -- on a tiny exchange in Dublin, Ireland, called Finex in November 2004.
Dozens of London-based IPE traders were flown over to Dublin to trade the NYMEX Brent crude oil; many were flown back to the UK each weekend, largely at NYMEX's expense.
"Launch day was surreal -- a major futures market set up in a converted warehouse, local forex traders overwhelmed by raucous oil traders and nightly bacchanals in the city's Temple Bar," says journalist Leah McGrath Goodman, whose book "The Asylum" documents the rise and eventual takeover of NYMEX.
Initially there were glimmers of hope, with daily trading in the thousands of lots. But NYMEX appeared to misjudge the time it would take to gain approval to open the London trading floor, while ICE hurried to make the switch to fully electronic trade.
KMAC CAN'T HELP
By April of 2005, when the IPE floor finally shut, NYMEX was still months away from opening its London pit. By September, the momentum had been lost.
"Trying to compete on their patch by going back to open-outcry, when ICE was already shifting toward all electronic trading, was a mistake," said Michael Korn, president of Princeton, New Jersey-based options brokerage Skokie Energy, who worked in London on the IPE floor between 1991 and 1996.
That was despite the efforts of Kevin McDonnell, one of the biggest NYMEX "local" speculators in New York, well known for trading the Brent-WTI spread. Referred to by other traders by his floor badge 'KMAC', he had been hired by the NYMEX to act as a market maker for their London-based exchange in 2005.
KMAC was paid $714,000 in 2005 for his efforts, according to NYMEX's annual report for that year.
In total, NYMEX reported that "general and administrative expenses" had risen by $20.2 million or 62 percent in 2005, "due primarily to transaction incentives the Company incurred during 2005, which it believes are necessary to promote trading in London and, previously, in Dublin." It also blamed "travel-related costs associated" with the floor for the spike.
By February of 2006, less than half a year after launching in London, the fate of the London outfit was clear. According to ----one person who visited the floor: "NYMEX had more employees than -there were trading firms on the floor."
The London floor shut permanently on June 9, with the by-now moribund Brent contract trading electronically.
Ultimately the adventure had even more lasting implications at home: While the NYMEX sought to undermine ICE with a London trading floor, ICE launched an electronically traded U.S. oil contract to steal liquidity from NYMEX's flagship product.
The member-controlled leadership in New York had not developed their own electronic trading platform for fear of threatening their members' floor-based franchises, and when ICE began making hefty inroads into NYMEX's WTI contract, NYMEX turned to the CME for an electronic trading platform. That deal paved the way for CME's wholesale purchase of NYMEX in 2008.
Copyright 2010 by Reuters. All rights reserved.
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