TSX and Nymex: Perfect Together?

Date: Monday, August 7, 2006
Author: Glenn Curtis, Wall Street & Technology

lthough the potential alliance between the Toronto Stock Exchange (TSX) and the New York Mercantile Exchange (Nymex) remains officially unconfirmed at press time, the industry is buzzing about its possible implications. Reportedly, the TSX is in talks to acquire a stake in the Nymex in return for control of TSX's Calgary-based Natural Gas Exchange. The deal could be a boon for traders, particularly if, as reported, the exchanges jointly offer stock, futures and commodities trading.

Nymex reportedly will offer TSX 10 percent of its equity, valued at about $150 million, in exchange for control of Calgary's Natural Gas Exchange, which lists many oil and gas issuers. If completed, the deal would create arbitrage opportunities for traders and, more specifically, hedge fund managers that wish to take or hedge positions in these resources, according to industry sources.

Jackie Chung, president of Competitive Metrics, a Toronto-based consultancy, says the exchanges' products - a wide array of mining and energy securities - are complementary. The combination of the two venues, Chung points out, would benefit traders and other investors looking to hedge their positions, conduct arbitrage, and/or buy securities and futures contracts on a single exchange.

Noting that "The TSX is an electronic model while the Nymex still relies on floor operations," Chung says there is an opportunity to reinvent Nymex as an electronic exchange, a move that would benefit the exchanges and investors, as an electronic venue would make trading faster and cheaper. This "would be particularly attractive to the buy side, which is always looking to reduce its share costs," she stresses. But, Chung warns, the investment required to go electronic could be significant, and there is a question as to what would happen to Nymex's floor brokers.

Brett Flynn, head trader at Red Bank, N.J.-based Lucas Capital Management, says he sees a benefit to the two entities going fully electronic. With about 40 percent of his firm's capital exposed to Canadian equities, Flynn also acknowledges the potential benefits of the deal in terms of hedging. On the flip side, he says, "If it just saves me a quick phone call, then I won't be too impressed. They will really need to show people that they'll be fast and cheap, and offer a broad array of products to make it work." Flynn's primary worry, he says, is that "the exchange will jack up costs in order to pay for the transaction initially."

A TSX spokesman says the exchange "routinely has discussions with other exchanges," but that the TSX would not comment on those discussions. He says, however, the exchange "has long held that it would like to be in the derivatives space. ... Richard Nesbitt, Toronto's CEO, has been adamant, saying in press releases over the last several years that the exchange has plans to offer derivatives once its agreement with the Montreal Exchange comes to an end."

The TSX spokesman adds that the exchange would not comment on rumors regarding a deal with Nymex. However, according to the spokesman, Jim Newsome, president of Nymex, has acknowledged that "TSX and Nymex have had very general conversations."