The New York Mercantile Exchange (NYMEX)
What Is NYMEX
The New York Mercantile Exchange, Inc., is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals.
The Exchange has stood for market integrity and price transparency throughout its 132-year history. Transactions executed on the Exchange avoid the risk of counterparty default because the Exchange clearinghouse acts as the counterparty to every trade. Trading is conducted through two divisions, the NYMEX Division, home to the energy, platinum, and palladium markets; and the COMEX Division, on which all other metals trade.
The Exchange pioneered the development of energy futures and options contracts 26 years ago as means of bringing price transparency and risk management to this vital market.
The Exchange plays a vibrant role in the commercial, civic, and cultural life of New York. It provides thousands of jobs in the financial services and allied industries and, through the New York Mercantile Exchange Charitable Foundation, supports cultural and social service programs in the downtown community as well as broader charitable endeavors in the metropolitan area.
What NYMEX Trades
The wide array of trading markets provided by the Exchange include futures and options contracts for crude oil, gasoline, heating oil, natural gas, electricity, gold, silver, copper, aluminum, and platinum; futures contracts for coal, propane, and palladium; and options contracts on the price differentials between crude oil and gasoline, crude oil and heating oil, Brent and West Texas Intermediate crude oil, and various futures contract months (calendar spreads) for light, sweet crude; Brent crude; gasoline; heating oil; and natural gas.
The Exchange also lists NYMEX miNY™ energy futures, fractional light, sweet crude oil and natural gas futures contracts that offer smaller investors and traders the opportunity for an efficient means of participating in energy markets. The contracts trade via the NYMEX ClearPort® electronic trading system and clear through the New York Mercantile Exchange clearinghouse.
The Exchange also clears off-exchange trades for market participants who wish to avoid counterparty credit risk by using standardized contracts for natural gas, crude oil, refined products, and electricity.
How To Get Started
Investors looking for a fast-paced dynamic market with excellent liquidity that can act as a counterweight to the stocks and bonds in their portfolio will want to learn more about the New York Mercantile Exchange energy and metals futures and options markets.
The challenge in meeting this price volatility takes place in the vigorous give and take among the traders on the New York Mercantile Exchange where the best up-to-the minute price emerges from their consensus. The price quotations are then used as benchmarks by buyers and sellers in the energy and metals markets worldwide.
Futures prices are not price predictions, but are the collective current opinion of the marketplace of where prices appear to be heading. That opinion, and the direction of prices, can change in an instant, which makes trading these markets so challenging and potentially rewarding.
A Market Open to All
The Exchange is a public market forum and anyone can play a role in these vital global markets. Participation is not difficult, but a few requirements must be met. The first step is to open an account through a licensed, Series 3, commodity futures broker.
The broker will be your point of entry to the markets, so make your selection with the same care and due diligence as you would any other financial services professional upon whom you rely.
The broker you choose should serve a clientele geared towards your level of trading. Some brokers mainly deal with commercial and institutional customers, some with individuals of high net worth, while others primarily serve smaller investors. Brokers offer different levels of service:
- A full service brokerage firm will be able to offer advice on investments and strategy, provide research, and contact you regularly with trading advice. A full-service brokerage could be especially useful if you are following many markets. The fees at a full service firm are usually higher than other types of firms.
- Discount brokers offer limited services and charge lower fees. Investors who do their own research and are confident in their trading abilities often find that discount brokers meet their needs. Introducing brokers are full service firms which execute the buy and sell orders through the large well-known financial houses which are clearing members of the Exchange. Introducing brokers are usually found in smaller cities and, while they may not have the name recognition of a big Wall Street firm, their service is often top-notch.
Broker will need to know certain information:
- Your financial situation.
- Your experience in trading commodity futures and options.
- Your tolerance for risk.
- Your risk management or investment objectives.
Each commodity trading account can have its own characteristics and be structured to the trader's needs. Brokers are engaged in a highly competitive business and customers may find that commissions are negotiable.
Many brokerage firms have streamlined the process of opening an account by making the required forms and documents available through their websites.
If the brokerage firm is not also a clearing member of the Exchange, it must have a relationship with a clearing member. The broker should have the proper forms and be able to help you fill them out to establish your account, including your margin account with the clearing member.
Margin Accounts Are a Must
All market participants on the New York Mercantile Exchange must have a margin account with an Exchange clearing member before they can transact any business on the Exchange. Many clearing members provide brokerage services, too.
Unlike the stock market, where "margin" refers to borrowed funds, margin in the commodity futures and options markets represents a performance bond - a "good faith" deposit - which can be used to cover adverse movements in prices for futures and short options positions. In order to protect market participants and the integrity of the overall market, the Exchange must ensure that participants have sufficient funds to handle losses. Margins are set by the Exchange based on its analysis of price risk and volatility in the market at that time. Margins are established at sufficiently high levels to adequately guard against market participants becoming over-extended as prices increase and decrease as market conditions change. The margin on the Exchange is not partial payment on a purchase.
The margin requirement also does not represent the value of the position which makes you responsible for a lot of product with a relatively small amount of money. For example, the initial margin required to open a position in a gold futures contract may be approximately $1,300 to $1,400, while the futures contract represents a quantity of gold that at the same time could be valued at approximately $30,000. This type of leverage can lead to quick and substantial profits - as well as losses. In fact, it is possible to lose more than the amount of money you've deposited so if the markets start moving against you, it is important to know when to cut your losses.
All positions on the New York Mercantile Exchange are marked-to-market each day by calculating the gain or loss in each contract position resulting from changes in the price of the futures or options contracts each trading day. If the equity in a customer's account drops to or under an amount predetermined by the Exchange, the clearing member must issue a margin call for the customer to restore his equity. Positions that show a gain receive a payment from the clearinghouse.
Stepping Up to the Big Leagues
Trading on the Exchange presents an intellectual and strategic challenge to those willing and able to take the risk. Trading can be executed through different financial instruments and venues, making the Exchange's markets extremely flexible and useful to a wide range of market participants which benefits everyone. The more participation, the greater the liquidity of the market and the more competitive the bids to buy and offers to sell.
The overwhelming majority of Exchange trading activity is executed by open outcry on the trading floor during the day. All floor traders, whether acting as a broker on behalf of a customer or trading for their own account, must be a member of the Exchange. Open outcry is a vigorous, often frenzied auction where each participant announces his bid or offer to the market at large, and receives responses from brokers willing to take the other side of the trade.
Energy and metals futures contracts are also available for trading on the internet-based NYMEX ACCESS® electronic trading system when the trading floor is closed, making the markets available for a more than 22 hours a day. To trade energy on line, one must have an account with a clearing member and be registered as a user. To trade metals, trades must be executed by a broker.
NYMEX miNY™ energy futures, fractional futures contracts for light, sweet crude oil and natural gas that offer smaller investors and traders an efficient means of participating in the energy markets, are traded through a broker or directly via the NYMEX ClearPort® electronic trading system.
A Time to Hedge, a Time to Speculate
Hedgers and speculators - also called investors - have divergent goals, which is why their presence in the markets complements each other so well.
Hedgers do not necessarily seek to profit in the futures markets. They use the futures to help stabilize the revenues or costs of their business operations because they have an offsetting position in the physical market. A gain or loss in the futures market is usually offset to some degree by the corresponding loss or gain in the market for the underlying physical commodity.
Speculators, to the contrary, do seek to profit from market movement because they do not have offsetting physical positions. However, for every speculator who tries to profit from a rising market there are those who believe they can profit in a falling market. Most speculators don't try to push the market in any direction - a fool's errand if there ever was one - instead they follow the trend, attempting to time their transactions by buying low and selling high - or first selling high and later buying back low. This flexibility to initiate a strategy as either a buyer or a seller, depending on your view, is one of the beauties of the futures markets.
By taking positions in the expectation of making a profit, investors fulfill a critical market role in providing the liquidity that hedgers need to easily enter and exit positions.
The Best Way to Figure Out What the Markets May Do
Some traders like to keep track of market fundamentals, the nuts and bolts of supply and demand. Is the weather too hot or too cold? Are there reports of production problems or surpluses? Are jewelry sales brisk or stagnant? Such developments in the underlying markets are often indicators of how prices may move.
Other traders study the technical reasons for price movements by using computer programs and examining charts of the market's performance for clues as to whether a buying or selling trend can be expected to continue or is due for a reversal.
The futures contracts on the Exchange are available for trading for many months in the future - several years in some cases. As a practical matter, the most actively traded and volatile contract months are those that are within a few months of a contract's expiration. As the expiration date of the contract draws closer, volume often picks up as activity in the futures market more closely resembles activity in the cash markets for the underlying commodity.
Most of the energy and metals futures contracts that trade on the Exchange are physically delivered contracts, although less than 1% of the commodities traded are actually bought or sold through the Exchange. Giving market participants the alternative of delivering through the Exchange, however, ensures that the futures prices will reflect the underlying market. Concerns over physical delivery obligations can be avoided by utilizing NYMEX miNY™ energy futures, smaller versions of the Exchange's two most popular futures contracts (crude oil and natural gas) that are specifically geared towards individual investors.
Source - The New York Mercantile Exchange