Nymex: "Evolution is Inevitable"
Michael Sankowski's comments on bootstrapping markets reminded me of my experience with the Nymex electronic contracts from 2002 to 2003. Essentially what we had on the oil side were 10-20 market-makers and arbitrageurs — and virtually no-one else. Active markets need a diverse set of traders with different motivations and time-frames. You can't build a market with market-makers and arbs only, even if they are well capitalized. You also need to attract long-term (fundamental) traders, short-term (technical) traders, and of course hedgers, ideally on both sides of the market. (Participants that derive entertainment from their trading can help too.) In the case of Nymex, it wasn't that they didn't "know better". They knew their business well and didn't get behind the electronic contracts until competition made it a necessity.
Leo Melamed, who pioneered financial futures, once said, "[a market] is more than a bright idea. It takes planning, calculation, arm-twisting, and tenacity to get a market up and going." Likewise, Mark Fisher advised me before I left the Nymex scene, "Jason, you don't think right because you think everything is about thinking." This was an exaggeration but he was basically right. Then, at least.
The rise of electronic trading at Nymex is a reminder of how long apparent inevitabilities, or great ideas, can take to develop. This pertains both to developments of new markets and developments within markets. CNBC loves to stress the speed and excitement of markets, but perhaps what is more impressive is how slowly - how painfully slowly - things usually play out. Stocks in the late '90s. Housing in recent years. The current account deficit and the dollar. Concerning new markets, take Robert Shiller's housing futures, which were over a dozen years in the making &mdash and three