ICE sues NYMEX over monopoly... energy trading market

IntercontinentalExchange Inc. has filed a suit in the United Stated District Court for the Southern District of New York against the New York Mercantile Exchange, Inc., (NYMEX) seeking to prevent NYMEX from abusing its monopoly power in the market for trading and clearing North American energy futures contracts and extending its monopoly into the market for over-the-counter (OTC) energy trading.

Intercontinental's claim, which was made as part of a counterclaim in an action initiated by NYMEX, asserts that NYMEX's efforts to prevent Intercontinental from using NYMEX settlement prices by claiming that these prices are copyrightable works of 'authorship' represents an illegal restraint of trade and is intended solely to restrict competition.

Intercontinental further asserts that NYMEX is in violation of federal antitrust laws through its practice of illegally tying its futures and OTC execution services to its clearing services and that NYMEX has used a variety of other illegal tactics, including the dissemination of false and misleading information, in its effort to undermine Intercontinental.

Former U.S. Attorney Dan Webb of Winston & Strawn, who is co-counsel to Intercontinental, said: "We believe that NYMEX's contention that its market prices are entitled to copyright protection as original works of authorship and therefore cannot be used by Intercontinental is simply unsupportable. We believe that NYMEX is engaged in the very type of conduct that the antitrust laws are designed to protect against."

"By seeking to prevent its principal competitor, Intercontinental, from using published settlement prices, NYMEX is attempting to maintain its existing monopoly over energy futures trading and expand that monopoly into the OTC arena. This self-serving practice, along with other abusive practices, including the tying of trade execution and clearing, enables NYMEX to extend its market power and extract monopoly fees on clearing. Fair competition requires that NYMEX be forced to end its anticompetitive behavior, which is what our claim seeks to accomplish," said Jeffrey C. Sprecher, Chairman and Chief Executive Officer of Intercontinental.

On November 20, 2002, NYMEX filed a lawsuit seeking to preclude Intercontinental from obtaining access to and using the publicly available prices at which its contracts for North American energy futures are settled. Based on NYMEX's own repeated public statements, its settlement prices reflect actual trading activity and are not set by NYMEX itself.

As a regulated monopoly, NYMEX is required under the Commodity Exchange Act and the Rules of the Commodity Futures Trading Commission to publish its settlement prices and these prices are widely referenced as a benchmark by many commercial institutions. In its lawsuit, NYMEX is now reversing its position, claiming that its settlement prices are copyrightable works of 'authorship' that incorporate the 'originality' and 'creativity' of NYMEX's settlement committees.

If NYMEX were to prevail in its attempt to selectively prevent one market participant from obtaining access to its publicly available prices, all market participants that rely on these prices would be at risk.

In December 2002, NYMEX announced its intention to introduce an electronic platform for the OTC market, in which its chief competitor would be Intercontinental. Intercontinental is the only market participant that NYMEX has attempted to restrict from referencing its settlement prices.

Intercontinental is seeking declaratory relief, injunctive relief, unspecified treble damages and attorneys' fees. Sullivan & Cromwell LLP and Winston & Strawn, well-regarded trial lawyers with extensive experience in antitrust law, have been retained to represent Intercontinental in this matter. The full text of the counterclaim is available on Intercontinental' s website at www.theice.com.

Just when you thought that the evil power marketers who basked in the shadow of Enron were all bankrupt, you find out that financial trading companies are still trying to make a buck however they can in the energy markets, even by controlling settlement prices for futures trades.

There was a situation where people submitting false trading data to a magazine which created an index were accused of manipulating the market. Now we see that companies are still fighting for dominance in just about all sectors of the energy trading business.

I wonder where it will all end?

I am facinated at all the firms that have gone into deep financial trouble while doing energy trading and yet at the same time, I am seeing firms fighting each other to get into or obtain a dominant position in this market.

Just when everyone thought that no one in their right mind would want to do energy trading, Bank of American announced that they wanted in. Now we see various trading companies fighting for the ability to create OTC energy products.

I guess that the smart money knows that energy deregulation is here to stay and they want to get a piece of the "action." Maybe Gray Davis can figure out some more people to threaten to litigate?

>I am facinated at all the firms that have gone into deep financial trouble while doing energy trading and yet at the same time, I am seeing firms fighting each other to get into or obtain a dominant position in this market.

"Energy trading"
is the sexy, evil blond
of the finance game...

While many trading operations and companies were "eliminated" in the wake of Enron, there is still a hefty business to be had in this un-regulated market. Witness the old Enron energy trading operations. It was bought by UBS Warburg and it is being resurrected in Stamford CT. From Sprecher's perspective, fewer competitors means a larger opportunity for ICE. Also, ICE has the opportunity to create the benchmark pricing data for use within the OTC industry. This data will be based on real transactions, not prices submitted by people and subject to manipulation.

I can't imagine that NYMEX could prevail in an argument that the closing prices were copyrighted information.

Is there an analogy here with stock prices? If you want real-time quotes, you have to pay for them.

I've always suspected that the banks had an ulterior motive when they drove Enron et.al into bankrupcy. Not that Enron was blameless, mind you, but it was the banks that refused to loan them the money needed to avoid closing up shop.

Bank of America Is Seeking Energy-Trading Authority from 9/3/2002.

Perhaps, although this appears to involve the use of published closing prices. I can't imagine that the marketmaker in a capitalistic society can withhold that data. That is so against public policy that it's hard to even argue.

A functioning market requires the free flow of information, not the least of which is prices. Imagine if the NYMEX made the price of crude oil private or available only to subscribers who were required to keep the information confidential.

Somebody has to compile the information and publish it. It seems like the information should be public, but then those who want it should pay a reasonable fee to cover those costs. Heck, whadthehelldoiknowabouddit...

The way I look at it is that the exchanges are sanctioned and regulated by the government to make sure they're clean. Part of the regulation should be a requirement that the prices be disclosed publicly.

There are costs associated with that, which may be recovered out of each stock or commodity transaction. I don't know how much the NYSE makes on each stock trade that I make, but they're getting a cut. They don't run that service as a charity.

I guess whether you view it as the sexy evil blond or as hefty business with huge opportunities, energy trading is going to be something that companies are fighting to get involved with.

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