Australian Exchange Enters Commodities Fray


SYDNEY—A new Australian energy-and-commodities exchange is the latest player hoping to lure trade away from venues in Chicago and London toward fast-growing Asian-Pacific economies.

But Financial & Energy Exchange’s bet that Australia’s resource bonanza will buoy its newest commodities exchange when it goes live this year is unlikely to change the landscape of energy trading globally.

FEX, of Sydney, filed an application this month with the Australian Securities & Investments Commission to establish the new trading platform. It seeks to add to Sydney’s drive to become a financial center for the Asian-Pacific region, after regulators allowed competition in the market for stock trading by permitting Nomura Holdings-owned Chi-X to compete directly with ASX Ltd. this year.

“I’d be really disappointed if we weren’t up and running by the fourth quarter,” said Thomas Price, a former options trader in Sydney who will serve as chief executive of the new exchange.

In practice, the new commodities-focused drive for oversees traders faces stiff challenges as competition heats up across Asia to attract action from established global exchanges.

FEX, 5%-owned by Nasdaq OMX Group Inc. and bankrolled partly by Australia’s second richest woman, mining heiress Angela Bennett, will have a tough sell attracting large energy traders. Most resource trading is done in 24-hour markets overseas, where banks, miners, drillers and importers have large trading shops and won’t be making big changes to shift business to Sydney, say executives for several large miners.

The new Sydney exchange will add to an already crowded marketplace in Asia. The Hong Kong Mercantile Exchange is expected to start with trading in gold and other metals shortly, while the Singapore Mercantile Exchange already offers futures on iron ore contracts. In China, the Shanghai Futures Exchange has just added lead to its slate of energy contracts.

Australia’s commodity exchanges have delivered mixed results. ASX in 2006 bought the old Sydney Futures Exchange, which had been founded in 1960 as the Sydney Greasy Wool Futures Exchange following a boom in wool; its original goal was to provide Australian wool traders the ability to hedge in their own country. ASX found little benefit in some of the metals products—some which are similar to those to be listed by FEX—and ceased them.

FEX won’t be clearing trades. Instead it has brought on London clearing giant LCH.Clearnet Ltd. for that role. While the decision eases the operating of a new exchange, traders worry the move will limit the upside given that exchanges’ largest revenue source is often in clearing. When CME Group Inc. posted a 14% revenue increase in the fourth quarter to US$763.2 million, clearing and transaction fee revenue was 82% of the total, or US$625 million.

“Because they don’t clear, to be successful they will really have to create a contract that catches the imagination of the investment community,” said Phil Flynn, a trader and analyst at Chicago energy trader PFG Best.

In a similarly competitive push in stock and options trading in the past decade, new exchange operators unveiled subtle trading rule changes to lure volume. FEX said it will offer no such incentive to get traders to come onshore, with Mr. Price calling such moves “gimmicks that don’t work in the long run.”

“Our focus now is to get the market site built and then look at getting more derivative products to come through,” said Ms. Bennett’s son, Tony Bennett, director of the family investment company backing FEX.

Resources account for more than 40% of Australia’s exports, with a continuing boom for iron ore and coal behind forecast growth of 4% or more in each of the next two years. Demand from China is the largest factor in that expected growth. In the last financial year, Australia exported 46.6 billion Australian dollars (US$47.8 billion) of goods to China, more than nine times the amount it sold just a decade ago. Iron ore constitutes more than half of that figure and is up more than 25 times from a decade earlier. FEX wants to capitalize on this growth.

Along with small and midsize Australian energy exporters and day traders looking to trade locally, volume for the exchange is expected to come from Chinese steel and other importers hedging energy risk in the Asian region. The exchange won’t handle the physical storage and delivery of commodities. Instead, contracts on the exchange will be cash-settled against an index tracking the underlying commodity. Unlike other exchanges in the U.S. and Europe, FEX will track the price of delivering those products in the Asian region.

Trading will take place in a data center outside Sydney’s central business district even as the company aggressively ramps up a physical presence downtown. CNBC already broadcasts out of its recently opened trading room on Bridge Street directly across from the Australian Securities Exchange. That trading room, housed in an older brick building similar in architecture to many from the city’s past, can be seen from the street.

“People like seeing an exchange with a physical presence and that wasn’t lost on us,” said Mr. Price from FEX.

—David Fickling in Sydney contributed to this article.


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