Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

New York Mercantile Exchange (NYMEX)

What it is:

The New York Mercantile Exchange (NYMEX), founded in 1872, is the world's largest physical commodity futures exchange, headquartered in lower Manhattan. NYMEX handles trades worth billions of dollars in commodities that are bought and sold on the trading floor, as well as on overnight electronic trading computer systems for future delivery.

How it works (Example):

In 1994, NYMEX merged with the Commodity Exchange (COMEX). Trading is undertaking within two divisions: the NYMEX Division, which focuses on the energy, platinum and palladium markets; and the COMEX Division, where metals such as gold, silver and copper are traded.

Transactional prices quoted on the exchange form the foundation for the prices that people pay for various commodities around the world. Specifically, these commodities include: crude oil; gasoline (leaded and unleaded); number two heating oil; palladium; platinum; potatoes; natural gas; gold; etc.

NYMEX is regulated by the U.S. Commodity Futures Trading Commission (CFTC), an independent federal watchdog agency. The NYMEX operates as a large trading put under the "open outcry system", in a continuous auction environment. Each company that trades on the NYMEX is required to send their own independent brokers. Consequently, traders act of the behalf of large companies; NYMEX employees merely record the transactions.

Why it Matters:

Futures trading, as exemplified by the daily activity on the NYMEX, provides investors and consumers with "price discovery" and a means for managing price risk. As ensured by the oversight of the CFTC, the NYMEX confers transparency, competitiveness and efficiency to commodities futures trading. It also allows investors to wield "leverage", by controlling a large bet on underlying commodities with relatively small stakes.

Companies that must hedge fuel prices (notably, airlines and trucking firms) look to price fluctuations on the NYMEX as an important barometer for future energy prices and as a foundation for their fuel hedging strategies. Governments and economists also look to the NYMEX, as a reality check for the price direction of energy and strategic metals.

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