JOE RAIA: So I mean, we went from having four energy contracts to-- when I left in 2011, to over 2,000. Those markets are for professional traders, right? And you're sitting in your house in New Jersey-- somebody's going to knock on your door with a tanker truck saying, hey, where do you want me to put it, right?

It's a bit of a perception that commodity futures is for individual investors. It really is not.

JUSTINE UNDERHILL: Hi, everyone. Justine Underhill here for Real Vision. For our last Tuesday Trend on oil, we have a fascinating interview between Rick Bensignor and Joe Raia all about the oil and commodities sector. Rick and Joe discuss the future of oil commodities, as well as how Joe found himself in the field. Let's get to it.

RICK BENSIGNOR: Joe Raia, thanks so much for coming.

JOE RAIA: Thanks for having me, Rick.

RICK BENSIGNOR: So if I've got this right, you've been in this business almost as long as I have, back to probably the 1980s.

JOE RAIA: A long time.

RICK BENSIGNOR: Yeah.

JOE RAIA: Very long time.

RICK BENSIGNOR: So the commodities markets have evolved quite a bit since then. I want to go back to earlier days for you. I understand that you went to SUNY Maritime college, and that's kind of an interesting background for someone who would make their way into the commodity industry. Was there anything that particularly happened that tied those two together?

JOE RAIA: The right thing at the right time. When you talk about commodities, in particular, oil markets, you look to the actual genesis of oil, right? Comes out of the ground, goes on a ship, or a pipeline, goes to a refinery. When you have the chance to-- after my years of schooling at the Maritime Academy and then going to sea for nine years and working in the oil industry, you do have-- shipping oil-- you do have a good opportunity to understand the genesis of the business, how it works, what's the logistical parts of it, and it's just an amazing way to really understand the real basis of the markets.

Just like any financial market, if you do research, and you look at an equity, you want to find out what's all about the equity. When you want to learn about oil, you kind of learn about, where does it come from, what kind of grade is it, what kind of products come out of it when they refine it, where do the products go when they refine it, are they kept in the country, or they export it. So there's so many different parts of it that, really, I found interesting.

I grew up on the water my entire childhood, so going to the Maritime school was somewhat of, I guess, a fait accompli for me. And I enjoyed it, and I had a great career going to sea for almost nine years.

I got my master's license. Came ashore and I started working as a port captain here for the firm that I was sailing with, and I got involved in buying fuel for the ships. And if you fast forward it, the guys that I was buying fuel from hired me. I ended up brokering and trading fuel for them.

And then went into the exchange, the NYMEX, back in the latter parts of '01 to work with Vinnie Viola, who was the chairman then, to look at building OTC clearing, which turned into ClearPort. So kind of a roundabout way to get there. I don't think it's the traditional path of getting into the financial markets.

But, certainly, when you come into that market with that understanding of the real foundation of the business, it does give you, I think, a better way to become successful in that business.

RICK BENSIGNOR: Yeah. I think so, because you have an edge in the sense that you actually have a basic fundamental understanding of markets. Most people who come into the commodity, these markets, are either speculators, traders, people who kind of find their way into the market, whether it's through the trading floor, like I did, or people get jobs upstairs, maybe on the operations side, eventually perhaps get to a trading desk.

So it sounds like you've experienced the supply chain process before you really got into working for commodities. Well, in this case, I guess it was NYMEX.

JOE RAIA: Correct. Right. And at the exchange, you really, as you know, you've worked there, you understand how those markets work, and being the real source and the genesis of liquidity and price discovery and risk mitigation. Those are important things and important parts of the extension of the markets.

And as markets became more volatile, there was more interest from the various participants that touch that market, whether the speculators, or commercials, or hedgers, or financial institutions to understand and participate in particular parts of those markets, whether it's crude oil or heating oil, or if you're a refinery, you're going to want to hedge both your intake, which is the crude side, and your output on the product side. So those firms had interest in hedging using the exchanges as tools for that process.

And it was very interesting to see how that grew over the years. Particularly, when I started there in late '01, the exchange only had three energy products and two other futures contracts.

RICK BENSIGNOR: Was that crude, unleaded--

JOE RAIA: And heating oil.

RICK BENSIGNOR: Heating oil. That before natural gas even--

JOE RAIA: It had natural gas also. It was listed in the early '80s. So 4 energy products, 2 metals products-- platinum and palladium. And so I went in there in '01, Vinnie Viola-- as I mentioned, Vinnie Viola, who was the chairman, asked me to come in. He knew I had OTC energy experience.

And he said, we need to figure out how-- Enron had just blown up-- and the participants in the marketplace were looking to find ways to mitigate their risk, right? So they were trading bilaterally with each other. All of a sudden, that got taken away when Enron blew up.

They were pretty much the counterparty to both sides of the trades, either the buyer to the seller, or seller to the buyer. And took on all that risk. And so the exchange was looked at by the participants in the marketplace to find a way to mitigate that risk-- list those products on the exchange, list them as futures, list them as clear products, so that you didn't have to trade bilaterally with each other anymore, you can trade basically with the exchange as your risk mitigant.

So it was an interesting time in the marketplace. I mean, we went from having four energy contracts to-- when I left in 2011, to over 2,000. So we spent that next 10, 11 years finding a way to build a product that would service the marketplace to mitigate their risk in those OTC, or former OTC energy products. It was really an interesting time.

RICK BENSIGNOR: So I know as part of your-- you've got on it that you helped create 1,500 products while you were at the NYMEX. So tell us a little bit about that, because to me that is just-- the success in being able to do a number like that-- there certainly aren't 1,500 futures contracts, so what are some of these products that you were able to develop? And was it for ClearPort?

JOE RAIA: It was for ClearPort. Correct. Right. So when you look at the foundation of the marketplace, you mentioned crude oil, heating oil, natural gas, and gasoline, there are multitudes of derivatives that were trading in the OTC market. So Henry Hub is an example, being the benchmark natural gas contract, futures contract, there were thousands of bases contracts and other instruments in the OTC world that were trading in between counter parties.

And as we started to grow ClearPort, build it and grow it-- and it wasn't linear. It wasn't successful right off the bat. I think there were times that Vinnie was ready to throw me out the window. But we knew that we were onto something and that the marketplace just needed to understand how to take an OTC contract that they had been trading for years and now move that into a futures market and all the things that come with that, margin posting, reporting, position limits, mark to market, transparency.

A lot of firms didn't like transparency. As we launched it, we started out with, I think, on May-- it was right around this time in May of '02, we launched about 15 products. And most of them were natural gas, because we had gotten a lot of input from firms to-- in the gas market, to say, listen, we're trading Henry Hub, but now we're trading a Houston ship channel basis contract, or a Rockies basis, and we need to find a way to list that on the exchange.

So we picked quite a few of the ones that people had asked us to list. And lo and behold, as we'd list those, we'd have firms come to us and say, well, you have this one, how about adding these other five? And so basically-- and they were all listed as cleared futures contracts.

Even though they weren't physically delivered, they were settling against an index, a financial index. And the CFTC gave us the approval to do that. So we took, like a Platts index, or an Opus index, or something that was--

RICK BENSIGNOR: A benchmark.

JOE RAIA: Right. And it was a well-known benchmark. And there was information about it. And there was also data that we can pull from our risk teams internally to manage the risk on those contracts and settlements and just the construct of the contracts. And so yeah, I mean, I think it was probably well over 1,500 while I was there. And certainly, after I left, they continued to list products just based on customer input.

You don't need-- certainly, when you look at the volumes in the futures markets, they're centered around four or five, six, seven contracts, right? But if you can service a sector of the marketplace-- a good examples is NGLs, natural gas liquids. Natural gas liquids, propanes, butanes, ethanes, they're not high volume products, but there was a portion of the marketplace of 20 or 25 participants that came to us in the mid 2000s and said, we love ClearPort.

We're trading Henry Hub on it, or gas on it. We're trading the NGLs now. As gas became more prolific in production in the US, the associated-- what they call associated dry gas are all those products, the NGLs that come out of the production of natural gas. So you separate it. You separate the natural gas from the NGLs, and the NGLs are very high in value, right?

Propane, butane are very-- and petrochemical markets are very valuable, but the market participants said, we want to hedge that. And so we would get an index. There were several indexes out there we contracted with for their settlement data, and we listed them in a matter of weeks.

It was very easy to push out contracts. It wasn't physically delivered, so you didn't have a lot of the mechanics and background that you needed to list the physical contract. You just needed the OK to use the settlement data.

RICK BENSIGNOR: And what type of volume did these have? Because when I think of NYMEX, I'm thinking of the big contracts that trade with lots of liquidity. Were these-- Let's say, these things don't even show up in the Wall Street Journal as a list of contracts. So was volume such that it really was for specialty needs of specific hedgers who needed a product that they could rely on that the counterparty would, in fact, be there as needed to take away the credit risk?

But are these the type things that traded 10 contracts in a month?

JOE RAIA: No more than that. I mean, certainly in the beginning, as the market participants became comfortable with clearing, right? Because a lot of them had never been involved in that before. As long as you had 5, 10, 20 participants that said, hey, we're going to trade this if you list it, a lot of times they didn't, but most of the times they would, because they were familiar with the vehicle.

And they also had other parts of their firms that may be using the product, or were using ClearPort, or the exchange already. So using an example, if at Exxon was trading natural gas futures and another trading group with at Exxon said, hey, I need to trade NGLs, and I need to trade it clear because I don't want to worry about a counterparty risk, we might lose the Exxon business if we don't list the NGL business.

So it really kind of goes hand-in-hand, even though that NGL market may be 100 contracts a day, or 1,000 contracts a day, and natural gas is trading 500,000 contracts a day. So it's still very low cost to list the contracts. There was some cost in the original launching of ClearPort, which was not a very high cost product.

And, again, to roll out new contracts was very, very easy.

RICK BENSIGNOR: So let me ask you, once we're talking about futures contracts, the competition that has grown over the years between the different exchanges and, of course, in the US, they basically now mostly fall under either the Chicago Merc, the CME Group, or ICE. So everything has kind of been absorbed by them.

And occasionally you're starting to see multiple contracts, or identical, or virtually identical contracts. You can trade oil. Most people think of NYMEX oil. But ICE also has a very similar contract that people are looking at and often will arb versus them.

So as this industry, both consolidates, because of technology and cost, but also tries to compete to be the main players, how do you see the growth going in the futures markets coming up in the next 5 to 10 years?

JOE RAIA: Certainly when you look at the floor and the open outcry markets that were so successful over so many decades for many, many, many years, the transition to electronic trading was so quick. I think it took a lot of people by surprise. Everybody thought-- particularly the floor-- a lot of the floor-- big floor traders-- felt that it was still going to be another few years before it went away or decreased in its importance.

And so we went electronic, I believe, in 2007. And I would say it was no more than six months later that the floor was basically done. All right. And so we still had the OTC markets from ClearPort, but the market was, and particularly the commercials in the marketplace and the majority of the market participants, whether they were prop shops, high frequency trading firms, hedge funds, commercials, banks, they all wanted better price discovery.

The guys on the floor had, as you know, had a purpose. And they were a very efficient marketplace for price discovery. However, it was a human being. And that speed in the marketplace needed to be ramped up. And so the CME, we did an electronic deal with them back in-- before we actually went public and merged with the CME.

We actually put together an electronic agreement with them to list our products on Globex and the futures contract, which was monumental. I mean, it didn't go very well when most of the board members of the NYMEX were locals still, as you know, how they can be, and certainly didn't want anything to do with electronic trading. But the marketplace was telling us, hey, you guys got to do something here, we're going to move our business to the other exchange ICE, which was obviously a very direct competitor of ours at the time, and still is of the exchanges.

And so we were in a very tough situation. We certainly wanted to try to keep hold of the legacy of the NYMEX, which was floor trading, which had such a great history in developing markets and futures markets, but we also wanted to satisfy our customers so that they continued to trade with us. So we tried a few different things.

And we ultimately decided we had to list the contracts. We were seeing a decline in open interest and in volume. And so we went and listed the contracts on Globex and they immediately became successful. The volume ramped up again. We had more participants.

And you can see, as time has gone on between 2007 and now 2019, the volumes have increased, you have more participants, you have more participants coming out of Asia now from volume that we never had before on any of the exchanges. And also, now working for RJ O'Brien, I see from the future side of the business, the clearing side, and the customers that come in and look to us to help them also get access to these markets electronically.

Not to say that their OTC markets still has a lot of brokers and voice broker model, which it does, but the main futures contracts are definitely-- the majority of that volume now is done electronically on the screens.

RICK BENSIGNOR: And how much of that volume is being done by HFTs, high frequency traders? Because, speaking of this morning, I was trading crude oil. And I'm watching every bid and offer. I have the screen that gives me the depth of market, so I see where the bids are for the next 10 bids lower, then 10 offers higher.

And every bid and the bid beneath the current bid, you can see the volume size just moves dramatically in large volume compared to any other size bid. And it's clearly just the computer's playing back and forth with each other. And for me, as somebody who is a speculator, just simply trading the markets, I really feel like I have a huge disadvantage in playing against supercomputers that have certainly no emotions, they just buy, sell, buy, sell, they probe, they probe, and they just feel out the market all day long.

And I saw it this morning, at 9:29 crude oil fell $0.30 in less than 10 seconds and then recouped to $0.30 in 10 seconds.

JOE RAIA: That's incredible.

RICK BENSIGNOR: So I mean, nothing like this would happen on the floor.

JOE RAIA: Right. Right.

RICK BENSIGNOR: And so it's so much harder a game to play now.

JOE RAIA: It is harder. Certainly, I mean, the number, or the percentage of volume, that is executed via algos, or high frequency trading firms, that's something that the exchanges keep that number to themselves, obviously. But you can just see that it's a very high percentage of the business, particularly in the most liquid contracts, right?

So there is Henry Hub, or WTI, most liquid, most visible, the algos that are basically trading there, whether it's directed by a bank, or a hedge fund, or a commercial firm, even, all firms now generally have access