The Commodities Boom Swallows the NYSE

Photographer: Gabriela Maj/Bloomberg

Oil outside an Emirates National Oil Co. plant.

The iconic New York Stock Exchange agreed to be acquired this morning — and not by one of the usual suspects. After failed dalliances with Nasdaq OMX Group and Deutsche Boerse AG, NYSE Euronext is merging with IntercontinentalExchange Inc., an Atlanta-based futures exchange.

The deal is a good study of where expectations are headed in the investment world. ICE, which began operations in 2000 has grown into the second-biggest futures exchange in the world, after the Chicago Mercantile Exchange.

The bulk of ICE’s business is in oil and gas futures. Commodities in general and oil in particular have been on a tear over the last four years. The S&P GSCI commodities index is up 80 percent since the beginning of 2009 (chart’s below).

Like other assets, commodities have benefitted from the the Federal Reserve’s loose money policies. Low rates and minimal returns on U.S. bonds have pushed money into other assets, like stocks and commodities. Bloomberg’s Bob Ivry today explains how that’s led to some outsized hedge-fund gains.

For speculators, brokers, and exchanges the stars have aligned to make energy futures trading appear particularly attractive: Total energy futures trading volume is rising, up 10.1 percent in 2010 and 12.6 percent last year, according to the Futures Industry Association. Volatility is high; the GSCI has ricocheted from a high of 715 to a low 0f 599 in the course of last year. And futures fees are not regulated like stock trading commissions. All those factors mean profit opportunities for a player like ICE.

However, though commodities are the flavor of the moment, don’t assume that things will stay that way. In the 1980s, as Michael Lewis recounts in his seminal ‘Liar’s Poker,’ there was no worse fate on Wall Street than getting assigned to equities. That changed in the 1990s, and then changed again in the 2000s.

Ultimately the success of commodities exchanges depends on the overall size of the market — and over the long run, commodities booms haven’t been sustained. At the moment, it feels like NYSE Euronext is shaking off its dull equities past. If the history of the markets is a guide, it may turn out that ICE is wisely buying an insurance policy for the future.

A version of this post appeared earlier in the Market Now newsletter. Click here to register at and subscribe to The Market Now daily email.

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