The New York Mercantile Exchange (NYMEX) is the world's largest physical commodity futures exchange, located in New York City. The prices settled each day on the Exchange for crude oil and other forms of energy are closely monitored by business and and financial analysts around the world, they strongly influence economic conditions, and they directly affect consumers via the cost of motor gasoline, heating fuels, air line tickets, and many other goods and services.

Its two principal divisions are the New York Mercantile Exchange and Commodities Exchange, Inc (COMEX) which were once separate but are now merged. The parent company of the New York Mercantile Exchange, Inc., NYMEX Holdings, Inc. became listed on the New York Stock Exchange on November 17, 2006, under the ticker symbol NMX. Less than two years later, on August 22, 2008, NYMEX Holdings was formally acquired by CME Group (symbol: CME) and the NMX symbol was de-listed.

The New York Mercantile Exchange handles billions of dollars worth of energy products, metals, and other commodities being bought and sold on the trading floor and the overnight electronic trading computer systems. The prices quoted for transactions on the exchange are the basis for prices that people pay for various commodities throughout the world.

The floor of the NYMEX is regulated by the Commodity Futures Trading Commission, an independent agency of the United States government. Each individual company that trades on the exchange must send their own independent brokers. Therefore, a few employees on the floor of the exchange represent a big corporation and the exchange employees only record the transactions and have nothing to do with the actual trade. The NYMEX is one of the few exchanges in the world to maintain the open outcry system, where traders employ shouting and complex hand gestures on the physical trading floor.

On February 26, 2003, the New York Board of Trade (NYBOT) signed a lease agreement with the NYMEX to move into its World Financial Center headquarters and trading facility after the NYBOT's original headquarters and trading floor was destroyed in the September 11, 2001 terrorist attacks on the World Trade Center

NYMEX plays a fundamental role in the formation of the day-to-day price of global crude oil prices. Crude oil is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel and petrochemicals. As a result, changes in crude oil prices affect the cost of many energy and non-energy goods and services to households, businesses, and government.

History of the exchange

Commodity exchanges began in the middle of the 19th century, when businessmen began organizing market forums to make buying and selling of commodities easier. These marketplaces provided a place for buyers and sellers to set the quality, standards, and establish rules of business. By the late 1800s about 1,600 marketplaces had sprung up at ports and railroad stations. In 1872, a group of Manhattan dairy merchants got together and created the Butter and Cheese Exchange of New York. Soon, egg trade became part of the business conducted on the exchange and the name was modified to the Butter, Cheese, and Egg Exchange. In 1882, the name finally changed to the New York Mercantile Exchange when opening trade to dried fruits, canned goods, and poultry. As centralized warehouses were built into principal market centers such as New York and Chicago in the early 20th century, exchanges in smaller cities began to disappear giving more business to the exchanges such as the NYMEX in bigger cities. In 1933, the COMEX was established through the merger of four smaller exchanges; the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange. On August 3, 1994, the NYMEX and COMEX finally merged under the NYMEX. Now, the NYMEX operates in a state of the art trading facility and office building with two trading floors in the World Financial Center in downtown Manhattan.

Energy futures and options

NYMEX introduced the development of energy futures and options contracts 26 years ago as means of bringing price transparency and risk management to the world's most important energy market.

A futures contract is supply contract between a buyer and seller, whereby the buyer is obligated to take delivery and the seller is obligated to provide delivery of a fixed amount of a commodity at a predetermined price at a specified location. Futures contracts are traded exclusively on regulated exchanges and are settled daily based on their current value in the marketplace.

Futures contracts are most widely used for hedging. Hedging allows someone to offset the risk of fluctuating prices when he or she buys or sells physical supplies of a commodity.

An option is contract that gives the holder the right, but not the obligation, to purchase or to sell the underlying futures contract at a specified price within a specified period of time in exchange for a one-time premium payment. The contract also obligates the writer, who receives the premium, to meet these obligations.

Crude oil began futures trading on the NYMEX in 1983 and is the most heavily traded commodity. The complete list of trading markets provided by NYMEX includes:

• futures and options contracts for crude oil, gasoline, heating oil, natural gas, and electricity;
• futures contracts for coal and propane;
• options contracts on the price differentials between crude oil and gasoline, crude oil and heating oil, Brent and West Texas Intermediate crude oil, and various futures contract months (calendar spreads) for light, sweet crude; Brent crude; gasoline; heating oil; and natural gas.

NYMEX itself does not set the prices of the traded commodities. The prices are determined in an open and continuous auction on the Exchange floor by the members who are acting on behalf of their customers, the companies they represent, or themselves. The process of the auction is called open outcry. A strong or distinctive voice is a must for a trader.

What determines the price a commodity trader is willing to offer for crude oil? Many factors-both objective and subjective-play a role in this process. These include:

• Current supply in terms of output, especially the production quota set by OPEC.
• Current supply in terms of storage, stocks and proved reserves of crude oil and its principal products. These quantities held in strategic stockpiles by the U.S. and the 25 member nations of the International Energy Agency, as well as inventories held by refiners, transporters and marketers of crude oil and its products.
• The demand for oil in the U.S., Europe, China, and other centers of energy consumption.
• Any political, economic, strategic, technological force-real or perceived-that affects a trader's view of where supply and/or demand is headed. A strike in the Venezuelan refining industry, civil unrest in Nigerian oil fields, or conflict in the Middle East will cause concern about possible future shortages in supply, and result in traders bidding up the price of oil. Conversely, news about a major new discovery, or economic forecasts for a slowdown in economic growth will push oil prices down.

Sources

• New York Mercantile Exchange, Accessed 6 September 2008.
• Wikipedia Contributors,New York Mercantile Exchange, Accessed 6 September 2008.