Monday, December 04, 2006

Cost of Nymex trading seat falls as screen trading surges

Don't think electronic market is changing the market landscape? Think again! case in point, the price of a seat on the NYMEX fell by a staggering 75%!

Cost of Nymex trading seat falls as screen trading surges:
"THE cost to lease one of the 816 seats on the New York Mercantile Exchange, the world's largest energy market, has plunged 75 percent as electronic trading overtakes the traditional open-outcry system.

Three new seat leases, which give the holder the right to trade on the Nymex floor in Manhattan, were issued starting on Friday at US$5,000 a month, and several renewals were also signed at that price. Last month, seats were leased for as much as US$20,000 a month, according to data on Nymex's Website."
and later:
"The shift to electronic trading is drying up liquidity on the floor," said Robert Webb, a finance professor at the University of Virginia and a former trader on the Chicago Mercantile Exchange. "It's totally a reflection of a lack of potential profit opportunity by trading on the floor.""

And from Bloomberg:
"As part of the IPO process, seatholders were issued 90,000 shares in Nymex for each seat they owned. Those shares are now worth about $11 million. Prior to the IPO, Nymex members traded the shares among themselves, often for about $45 each, valuing a seat at about $4 million just a month ago.

The trading right component of a Nymex seat yesterday sold for $500,000, according to Nymex's Web site."

So while trading is still taking place, it is migrating more and more to electronic markets and not the floor.

1 comment:

David said...

Hi Prof,

I think what the article overlooks in discussing the drop in seat prices is the nature of the demutualization process.

Before most of these exchanges went public, they were private member-owned firms. As they underwent the process of becoming public corporations, members were given rights to shares in the new company.

These rights were proportional to one's level of seat ownership and membership status. In the case of the Chicago Board of Trade, I believe that most of the value shifted from seats to company shares following the IPO.

In the wake of the IPO, members still held (in addition to their newly floated shares) seats which could be leased out, but the value of these seats dropped immediately.

To the best of my knowledge, the drop in seat prices largely reflected the fact that seats were no longer the ownership claims that they once represented. Ownership in the newly public exchanges are, of course, now held in the form of public shares.

Hope someone from the exchanges will come by to confirm/deny that.

David