ICE-NYSE deal offers trade-off for soft commodities

Thu Dec 20, 2012 6:57pm EST

* ICE buying NYSE Euronext for $8 billion

* Purchase gives ICE a global softs presence

* Traders expect the merger to lower arbitrage costs

By Marcy Nicholson

NEW YORK, Dec 20 (Reuters) - After its blockbuster $8 billion deal to buy NYSE Euronext, the IntercontinentalExchange will have a near monopoly on futures trading in the world's tastiest commodities, from sugar to cocoa to coffee.

And while the combination of New York's soft market with the London contracts owned by NYSE's Liffe may help cut costs for many traders by allowing them to post less collateral for spread trades, some also expressed concern that ICE's more speculator-friendly approach could erode Liffe's consumer-based traditions.

The difference is more philosophical than commercial, but could be important at a time when ICE Chairman Jeffrey Sprecher is seeking to retain the allegiance of New York soft commodity traders after shutting down the 142-year-old trading floor.

"Whereas European markets have tended to respect the needs of physical trading entities that provide the bedrock for the commodity market, ICE has been all about attracting volume from any source at any time," said one U.S. dealer who trades physical commodities as well as on Liffe and ICE futures.

"Anything that would lead to Liffe behaving more like ICE is not an attractive proposition to us."

The soft commodity contracts are really a sideshow to the larger logic behind ICE's deal, which will propel the Atlanta-based exchange into European financial futures and help it to take on arch rival CME group.

But the London International Financial Futures Exchange (Liffe), the second-largest European derivatives exchange, also trades white sugar, robusta coffee and cocoa futures and options. The contracts are all similar to those on ICE Futures U.S., although the qualities differ slightly, with New York trading unprocessed raw sugar and higher-quality arabica coffee.

(FACTBOX on ICE/Liffe agricultural markets: )

EARLY HOURS

ICE, which was founded in 2000 and whose main operations are in energy futures, took on the softs complex - coffee, cocoa, sugar, frozen concentrated orange juice and cotton - in 2007 when it bought the New York Board of Trade.

It quickly introduced electronic trade and extended trading hours, rapidly increasing its trading volume, bringing the careers of hundreds of floor traders to an end. The trading floor shut completely in October.

Few expect ICE's domination of the soft commodity markets to attract much regulatory scrutiny.

"They are becoming a major player globally in all the different softs businesses, but those are small markets, and I don't think that it's anything that would cause the regulators any problem," said John Lothian of the John Lothian Newsletter in Chicago.

But the threat of greater concentration comes at a time when ICE has recently announced increased market fees, effective in January, causing traders to wonder if more price hikes are on the way and could possibly be directed at dealings on Liffe.

"If you have a lack of competition, fees tend to go up," says Michael McDougall, a vice-president for brokerage Newedge USA in New York.

BOOST FOR SUGAR

The biggest winners from the deal are likely to be arbitrageurs who trade the same commodity on both exchanges in order to profit from the difference in price.

It's a major aspect of daily dealings in cocoa futures, with the London market being dealt in the British pound and the New York market in U.S. dollars.

"Given that Liffe now will be owned by ICE, potentially we could see a reduced margin structure when you trade whites with raws," McDougall said.

In coffee, Liffe's cheaper robusta contract is commonly traded against ICE's arabica while the processed white sugar that trades on Liffe gets a premium against the ICE raw sugar futures.

"Anything that will add to liquidity and ease of trading of the London market should be welcomed," said Jonathan Kingsman, a sugar trade veteran who heads agriculture at information provider Platts.

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