Nasdaq plans challenge to energy futures duopoly

Nasdaq OMX plans to break into global oil and gas derivatives markets, invading the turf of established commodity exchanges by offering traders lower fees.

The New York exchange group has signed up brokers, trading firms and banks including Goldman Sachs, JPMorgan Chase and Morgan Stanley to back a new energy futures venture to launch in 2015, industry executives said.

Tentative products would include futures and options on West Texas Intermediate and Brent crude as well as US natural gas.

The move would make Nasdaq a third contender in an already fierce fight for energy market share between CME Group and Intercontinental Exchange, which together list the benchmark oil and gas contracts. Despite the dramatic fall in oil prices and wild swings in gas, energy volumes on both exchanges shrank in 2014.

Nasdaq has been aggressively trying to spread beyond equities trading, where profits have contracted amid tough competition. Previous initiatives include the $750m purchase of eSpeed, a government bond trading platform, and the launch of NLX, an interest rate derivatives platform in Europe. It also has a European power business.

Nasdaq re-registered its US futures exchange last November after a lapse, a regulatory filing shows. In a notice posted online, the exchange said it planned to add “core benchmark products in crude oil, natural gas, and US power” to its offerings, allowing traders to “access liquidity at below current published market rates”.

A person familiar with Nasdaq said executives believed current energy trading and clearing fees did not reflect the efficiencies of what is now a largely electronic marketplace. “The pricing is generally wrong. It’s a lack of competition,” the person said.

While executed on Nasdaq computers, trades would be guaranteed by the Chicago-based Options Clearing Corporation, whose executive chairman is Craig Donohue, former chief executive of CME.

Javier Loya, chief executive of energy broker OTC Global Holdings, said his company will back the new exchange.

“I think it’s a good opportunity for a third party to come in and challenge the vertical silos of both CME and ICE with a different market structure,” Mr Loya said. “Ultimately, clients want to see competition. They want to see fee reductions.”

An executive at a large energy trading group uninvolved with the venture was sceptical, however. “They don’t have a competitive advantage,” he said. “They’re trying to enter into a market that is largely dominated by two incumbents that do a very good job, CME and ICE.”

Nasdaq’s products would be “lookalike” contracts with prices based on futures at CME and ICE.

One potential lure for the exchange is looming position limits on energy speculators. By spreading positions across a few exchanges, a trader could maintain larger bets than if all were kept at one exchange, a futures executive said.

Nasdaq said it “works closely with customers to understand the demands of the marketplace and opportunities to provide customers with competitive alternatives and greater efficiencies that leverage our technology and expertise”.