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Flashback Wall Street: Remembering the Glory Days of the NYMEX

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  • Flashback Wall Street: Remembering the Glory Days of the NYMEX



    It was a place where cacophony reigned. The level of noise was one you might expect at a sports stadium, but the key players on the scene weren't athletes scoring home runs or touchdowns. Rather they were traders—very loud and animated ones.

    They shouted bids and offers, frantically flashed hand signals to indicate specific trades and tossed cardboard chits into pits on a historic, now-shuttered trading floor: that of the New York Mercantile Exchange.

    "It was a wild, intimidating place," said Jon Rooney, a former trader. "You've never seen anything like it."

    The New York Mercantile Exchange, or NYMEX, is an exchange for trading futures and options contracts for commodities, mostly energy and metals. At the end of 2016, the NYMEX's owner, CME Group, closed the exchange's storied Manhattan open-outcry trading floor in favor of electronic trading, which in recent years had come to account for most of trading volume on the exchange. The floor's closure marked, as a Wall Street Journal headline put it, the "end of an era."
    The NYMEX was established in 1870s as the Butter and Cheese Exchange of New York, a cash market for butter, eggs and cheese. It changed its name to the New York Mercantile Exchange in 1882 "to attract a broader range of grocers and merchants," but remained focused on agricultural commodities for about a century, according to the book "Exchange-Traded Derivatives" by Erik Banks.
    Those commodities included potatoes, which were at the heart of a 1976 scandal that threatened the exchange's survival. At the time, speculators defaulted on 1,000 contracts for the delivery of 50 million Maine potatoes, resulting in "one of the biggest financial scandals to hit the market in years," the New York Times reported.

    “The default was unprecedented,” exchange president Richard B. Levine, told the newspaper in 1976. “There has never been anything like it in the 104 years of the exchange."

    Even before the potato fiasco, the exchange had a reputation of sorts. In contrast to the more reserved, college-educated traders at the famous New York Stock Exchange just a few blocks away, commodities traders, such as those at the NYMEX, were known as "brawlers," said Richard Sylla, a professor emeritus of the history of financial institutions and markets at the NYU Stern School of Business.

    "They came out of high school, learned the hand signals, milled about the floor and worked their way up," Sylla said. "They were more lively."

    In 1976, a New York Times reporter described a typical sight at the exchange as one where "men scream and shake their arms and hands at each other's faces [and others] dash about as if fleeing invisible demons."

    In the late 1970s and 1980s, excitement at the exchange centered less on potatoes and more on energy futures, thanks largely to volatility in oil prices. The NYMEX's light sweet crude oil contract, in particular, became the most actively traded energy contract in the world after it was introduced in 1983, according to Banks' book.

    "In the 1970s and '80s, there was tremendous amount of innovation in commodity markets," said Sylla. "The exchanges were coming up with many new contracts."

    That innovation extended not just to energy futures, but to metals. After the U.S. government abandoned the gold standard and made private gold ownership legal in the 1970s, an exchange known as the Commodity Exchange of New York or COMEX introduced gold futures. Before then, COMEX traded in commodities ranging from copper to animal hides, but its foray into gold products helped make it a top metals exchange— one that eventually attracted the interest of the NYMEX's owners, who purchased the COMEX in 1993.

    For all the changes at the NYMEX, what remained a constant for decades was the commotion in the trading pits.

    "You had people literally running back and forth from different trading rings," said Rooney, now 36, who started at the NYMEX as a clerk in 2002 before becoming a COMEX trader the following year. "There were 200 to 300 traders, crammed shoulder to shoulder, screaming and throwing pieces of paper."

    Part of the NYMEX's gritty culture was wrapped up in the old-fashioned way most of its denizens continued to do business, even after technological advances allowed the advent of fully electronic exchanges.

    NYMEX traders recorded their trades on paper and special cardboard chits. They shuffled the papers to their own clerks while throwing the cardboard chits into the trading pits, where they were collected by NYMEX staff. The information from the cards was ultimately entered, by hand, into the exchange's computers.

    It was a system that "the older timers were used to," said Sylla. "It was a part of their life."

    The old timers notwithstanding, the NYMEX couldn't fend off electronic trading forever. In 2006, after a rival exchange introduced an electronic oil contract, the NYMEX announced it would launch electronic trading that would take place at the same time as traditional open-outcry trading.

    "The launch is likely to result in electronic trade becoming the preferred way to trade oil," the Financial Times predicted at the time. The newspaper proved correct.

    In the years that followed, open outcry trading volume for oil and other commodities shrank precipitously, both at the NYMEX and other commodities trading platforms.

    In 2008, CME Group, a Chicago-based futures-market operator, purchased the NYMEX. Seven years later, the company announced that it would end futures trading at the NYMEX pits and most of its Chicago pits in favor of electronic trading. Floor trading for options contracts survived at the NYMEX for another year until the CME Group shut it down in December, 2016.

    Other, lesser known exchanges around the world, too, have seen a similar decline in their open outcry traditions.

    "The modern technology makes screen trading much more efficient," Sylla said. As a result, he added, "commissions are getting to be very low and the guys running around the floor can't do enough business to justify keeping the floor going."

    Some question whether the NYMEX and its shuttered floor might prove a cautionary tale for the most famous trading floor in the world, the New York Stock Exchange. Sylla doesn't rule out the idea.

    "It's like a lot of other human things," he said. "Technology comes along and makes them outmoded."

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