Nymex's Time to Fly

Its IPO could be the hottest exchange deal yet.
Author:
Publish date:

Traders are chomping at the bit, waiting for the IPO of the New York Mercantile Exchange to arrive at the starting gate.

Although the initial public offering for the 134-year-old commodity and futures exchange is small compared with other stock deals this year -- it plans to raise just $370 million -- most expect shares of the Nymex to be off to the races soon after their debut.

Indeed, institutional investors are already jockeying for position. Just three days before the Nymex is set to begin trading on the

New York Stock Exchange

, the exchange bumped up the price range for its shares by 10% to between $54 and $57. Nymex's parent, Nymex Holdings, also raised the size of its offering by 500,000 shares to 6.5 million shares.

"Nymex is really one of the last viable exchanges to go public," says Adam Sussman, a senior analyst at TABB Group. "All of these exchanges that have gone public over the last couple of years have performed very well. Some people are viewing this as the last opportunity to take advantage of the exchange IPO market."

Other than Nymex, the Chicago Board of Options Exchange is the last major exchange that is still a private company. But that too is changing. Earlier this year, the CBOE announced plans for a demutualization, and it is likely to pursue an IPO.

Expectations are high for the Nymex, because shares of other commodities and futures exchanges have swelled since going public -- with some even dwarfing the outsized performance of Internet search engine

Google

(GOOG) - Get Report

. Some are whispering that the Nymex, which will have a market cap in excess of $5 billion, could set a record first-day pop for an exchange stock. That would be quite a feat.

A year ago, the Nymex's main competitor, the

Intercontinental Exchange

(ICE) - Get Report

, rose 51% on its first day of trading. Since then, shares of the ICE have risen 240%.

The

Chicago Mercantile Exchange

(CME) - Get Report

rose a more modest 23% on its first day of trading in December 2002. But it's up a whopping 1,343% since then. The

Chicago Board of Trade

(BOT)

, which the CME is acquiring, rose 49% when it went public in October 2005, and is up 107% since its debut.

Nymex's IPO is expected to be red-hot even though the energy sector has cooled off from its torrid pace earlier in the year. But beyond crude oil, natural gas and electricity, the Nymex is also a major platform for trading futures and options contracts in all sorts of precocious metals. It also operates a smaller metals exchange called the Commodities Exchange, or Comex.

One reason for the appeal of exchange stocks is that the biggest ones are seen as cash-generating machines -- especially with electronic trading reducing operating costs. The potential for consolidation in the sector also has generated enthusiasm. In the wake of the CME's pending $8 billion acquisition of the Chicago Board of Trade, many predict the Nymex ultimately may also get gobbled up down the road.

In addition, futures contracts, the staple financial product traded on the Nymex, are becoming popular investment vehicles for institutional investors, says Michael Greenberger, a professor at the University of Maryland Law School and a former director or trading and markets for the CFTC during the Clinton administration.

A futures contract is an agreement to buy or sell a commodity at predetermined price. On the Nymex, trading in futures contracts rose 13.4% over the past year to 175.9 million, an indication of fast growth in this kind of trading.

"The financial community has come to understand, respect and have great appreciation for the role that futures contracts have in hedging and intelligent speculation," Greenberger says. "It's now been made part of a common financial language on Wall Street."

But observers say it will be imperative for Nymex to expand its offerings beyond the institutional trader to the average retail investor. Futures contracts right now are a long way from being widely used -- or understood for that matter -- by most retail investors. Until that changes, there could be a natural limit on the Nymex's growth opportunities.

As exchanges seek to diversify revenue streams, "there is going to be a renewed effort in pushing these products out to retail investors and simplify the way the average Joe can access these products," TABB's Sussman says. "That would be a huge increase to the bottom line."

Another concern for the Nymex is the impact of the looming merger between the Chicago Merc and the Chicago Board. The deal is likely to lead to higher operating costs for Nymex, which does much of its electronic trading through the CME.

"It would not surprise me" if the CME were to increase costs to trading, "which would directly impact the profit margins on the Nymex," Sussman says.

He says the dependence on one competitor for its clearing technology will likely drive the Nymex to do an acquisition sometime within the next year.

But all those concerns are for another day. Right now all traders care about is getting some shares of Nymex before they sprint too far ahead.