In case you guys hadn’t read the news, my old friends at ICE (Intercontinental Exchange) are buying the NYBOT (New York Board of Trade). The price of ICE was up 15% in Friday’s trading when the news was announced…

I remember back in the day, a question came up of why does ICE even exist? There are quite a few different answers… all with varying roots in reality.

1. ICE futures avoid the CFTC’s scrutiny. See the Senate investigation into oil speculation and market manipulation.

In addition, due to past regulatory actions by the CFTC, oil and gasoline traders in the United States may now electronically trade U.S. energy commodities on a London futures exchange, called ?ICE Futures.? ICE (Inter-Continental Exchange) Futures is regulated by the United Kingdom Financial Services Authority, but not the CFTC. As a result, persons within the United States seeking to trade key U.S. energy commodities ? U.S. crude oil, gasoline, and heating oil futures ? now can avoid all CFTC oversight and reporting requirements simply by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

This isn’t really the reason ICE was created — they didn’t have a base in London until they bought the International Petrolium Exchange (IPE) back in 2002. Back when it was first taking off the ICE was considered OTC (over the counter) and thus subject to less regulation.

2. Private party credit agreements. You get to set how much credit you are willing to vouch for with any of the other potential counterparties to trading on the exchange. In this way, you are only able to take trades where both you have extended credit terms to the counterparty, and them to you.

This has a couple of benefits — you know where to go for settlement, and the large traders (bankers and energy companies) can also trade in much larger size because they don’t have margin requirements, they have credit requirements instead.

[Tangental side note: I remember reading in Market Wizards (or something similar) that the large investment banks don’t deal with margin the same way we do. Instead, they can put on as many positions as they feel is appropriate regardless of the nominal or margin amounts those contracts represent. Traders don’t have an account with a balance, but rather trade with the bank’s sanction. I believe the attitude on this has shifted significantly in the last decade with an increased importance on risk management.]

3. Ego. The major players — investment banks (like Goldman Sachs, Morgan Stanley, JP Morgan, CSFB, etc.) and the oil super-majors (BP, Shell, SocGen, etc.) were annoyed at how the NYMEX was being run. It was (and to a certain extent still is) a private club and the major players thought they were giving up too much control and overpaying NYMEX for their services. They all invested in ICE and a new exchange was born.

4. Competition / an Electronic Trading Platform. NYMEX has claimed that it will never go electronic and will always remain open-outcry. (They change their stance slightly on this one regularly.) Quite a few people outside of the private club like and want electronic trading and saw it as the future. NYMEX won’t accomodate? Build a marketplace to compete. With an electronic marketplace the nimble traders could move more volume without a floor trader realizing their position, and scalping them as they move sizable positions around.

5. Enron. I don’t know if the majors saw Enron’s collapse coming, but when ICE first started out it was more a competetor of Enron’s eMarketplace than a competetor of NYMEX. When Enron left the scene, ICE stepped up and took all the volume that wasn’t going through NYMEX. This may not be a reason for it to be created, but it lent a lot of support to its eventual success.