The New York Mercantile Exchange, or NYMEX, is the largest exchange for physical commodity futures in the world. The NYMEX has been part of the Chicago Mercantile Exchange Group, or CME, since 2008, and offers global benchmarks for key derivatives areas, including energy, agricultural products and metals.
The NYMEX is overseen by the Commodity Futures Trading Commission, or CFTC, which regulates the derivatives industry and ensures the integrity of its products and exchanges.
The NYMEX plays a key role in global economic and financial structures by hosting the world’s benchmark derivatives for energy and metals. Both energy and metals are key inputs in a large range of manufacturing, and companies from every point in the production process rely on derivatives to manage their risk and smooth their costs and revenues.
Futures volumes will often far outstrip the trading for the underlying commodity, and a centralized source for futures based off global benchmarks is essential for maintaining a liquid futures market for commodities. The NYMEX trades around 3 million contracts per day, which is approximately 10% of all derivatives contracts traded daily.
NYMEX and Open Outcry
The NYMEX is still based on the old open outcry system, where traders physically gather on the trading floor to haggle over buy and sell orders. However, there is an increasing presence of electronic trading for NYMEX products, and the NYMEX is transitioning to a fully electronic system.
The ongoing reliance on the open outcry system means that trading for NYMEX futures is different than what most equity or bond traders are accustomed to. Traders must place their order with a broker, which is then funneled to a trader who is physically on the floor of the NYMEX, who then executes the trade. This arrangement can lead to a different trading dynamic than what most traders are used to from using purely electronic exchanges.
The Importance of the NYMEX in Trading
The function of the NYMEX is important for all traders, even if they rarely or never trade in commodity futures or other derivatives. As the source for global benchmarks for a number of critical physical commodities, the process of ‘price discovery’ that takes place on the NYMEX is integral to the functioning of global markets.
Physical commodities such as gold, copper, iron ore and oil all act as bellwethers for the perceptions of market participants.
For example, copper, iron ore and oil all increase in value with positive forecasts for global growth, as market participants are willing to pay more for these inputs on the expectation of an increasing price for outputs under positive global economic growth.
Conversely, gold is used as a store of value and a safe haven asset in times of market uncertainty. Therefore, the price of gold is used as a metric for the market’s current appetite for risk, or lack thereof.
Traders who track the price of futures on the NYMEX and similar exchanges have access to one of the best sources for insights into the mind and mood of the global financial system. Market participants make their sentiments known through their trades in the futures for these essential commodities, which provides a continuously updated snapshot of global market sentiment.
Trading in Futures on the NYMEX
While both the fundamental and technical analyses for futures are essentially the same as for equities, there are some key differences in trading and exercise mechanics that affect the price of these securities.
Traders who wish to enter the futures market should take the time to familiarize themselves with the mechanics of futures trading and exercising on the NYMEX, so that they are not surprised by the unique price effects that futures face.
The NYMEX is an essential element in the contemporary global financial landscape. The futures for physical commodities that are traded on the NYMEX act as global benchmarks for an enormous variety of companies and other institutions that are affected by the manufacturing and production sectors.
Furthermore, the price discovery that takes place on the NYMEX acts as a bellwether for the global economy, as market participants demonstrate their current market sentiment through the buying and selling of futures contracts for essential physical commodities.