There are many on Wall Street who believe the upcoming New York Mercantile Exchange's IPO simply sets the stage for the company to be taken over down the road.While a takeover may be somewhere in the Nymex's far future, industry analysts say the 132-year-old exchange, which is looking to raise $250 million in an initial public offering, will need to reform its old-school ways before any suitors are likely to come knocking on its doors. The problem for Nymex is similar to the one the New York Stock Exchange ( NYX) faced before it went public by joining forces with the all-electronic stock exchange Archipelago. Like the old Big Board, the Nymex still operates much like a private club, with a hardened group of floor brokers and well-paid traders calling the shots from the trading pits. Critics say the clubby atmosphere at the Nymex is a big reason the commodities exchange has been slow to embrace electronic trading and has eschewed the cost-conscious ways of its peers. "Many of these guys have been in an energy pit for years," says one industry analyst who asked to be unnamed because of his firm's restrictions. "They want to maintain the status quo; they aren't forward-thinking." Nymex is one of the last institutions in the U.S. that still has the stereotypical trading pits that have become emblematic of bare-knuckled capitalism over the years. "Why do they need to yell and make funny gestures?" its Web site reads. "Three little words that make the world go round. Buy and Sell." Analysts say that until the floor brokers and floor-based traders show a willingness to adapt to newer technologies, potential suitors may keep their distance. That kind of change may be hard for some of the entrenched interests that dominate the Nymex, particularly since the exchange's traders are some of the highest earners on Wall Street.
A 2005 survey by Trader Monthly magazine found that 10% of the 100 top-paid traders worked at the Nymex. Floor traders with the exchange showed up more frequently in the survey than traders with any top Wall Street firm, including Goldman Sachs ( GS). The Nymex traders even surpassed the fast-money crowd at some of the nation's most successful hedge funds, including Steve Cohen's SAC Capital and Eddie Lampert's ESL Investments. The IPO will certainly bring the well-paid traders more cash. Takeover supporters argue that the IPO is the first step in eliminating the floor, through paying out the traders and pushing the exchange toward an electronic platform. But a scan of the industry proves that switching floor trading to electronic trading, although it certainly makes sense, is a slow and difficult process. Take, for example, the NYSE. Industry experts point out that one of John Thain's main challenges as CEO of the NYSE has been serving as a diplomat and soothing the egos of the Big Board's floor brokers and specialists. Thain has had to tread carefully to make sure that the merger with Archipelgo's electronic exchange doesn't lead to the extinction of the NYSE's historic floor-based trading model. "Exchanges going public always have to change from creating economies for members to creating economies for shareholders," says Jamie Selway, a former Archipelago official who now is managing director at White Cap Trading in New York. "You need to reorient your business to make decisions based on shareholder interest, which means employing technology that is good for operating leverage in the business." The irony is that the Nymex could have a ready merger partner in the CME. The CME provides exclusive electronic trading services for the Nymex's energy futures and options contracts. It also has the experience of hand-holding floor-traders through the process of electronic trading integration.
But some say the CME may feel no need to acquire the Nymex, because the current arrangement is already fairly lucrative. "The Nymex has to pay them a pretty substantial commission for electronic execution, so what would the CME be buying?" Selway says. Better yet, the CME deal with the Nymex is a low-risk arrangement. In buying the Nymex, the CME would have to deal with managing the big egos of the Nymex floor brokers and traders. CME executives may decide that's a headache they don't need. Another natural suitor for the Nymex is the Intercontinental Exchange ( ICE), the Nymex's all-electronic exchange competitor. But a merger with the ICE might mean the death knell for too many Nymex floor brokers and traders and create a similar headache for the all-electronic ICE. Despite the takeover question, most everyone agrees that, in the short-term, Nymex stock is likely to be a hit. The Nymex has unmatchable liquidity in oil and gold futures contracts, two commodities where volume has spiked over the past year because of hedge fund interest. It is also riding the momentum of a number of recent successful exchange IPOs. The Chicago Board of Trade ( BOT), the ICE and the NYSE all issued shares for the first time in the past year. All three companies saw shares surge in the first weeks of trading, and some of their success will probably rub off on the Nymex. And of course, no exchange stock has performed as well as the CME, whose shares have increased tenfold since its IPO in 2002. "Anything that even remotely resembles an exchange is hot," says Phil Guziec, equity analyst at Morningstar. "Exchanges, in general, are great businesses, and there isn't anything changing about interest in IPOs."