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Crowded Online Trading Field Expected to Shrink

Crowded Online Trading Field Expected to Shrink

In the short term, more players will move onto the online trading field, grabbing up customers as independents, through consortiums with other companies, or proprietarily, like Enron has done. However, though there will be a some winners in every arena in the short term, eventually, more will end up in the losing category as traders move toward the most efficient and best access sites.

That's the consensus opinion of a diverse group of online trading company officials, who last week talked about how they see the future of the business evolving during a panel discussion on the closing day of PowerMart 2000 in Houston. The three types of online trading vehicles - independent, proprietary and consortium - were amply represented.

While all agreed that the market was too crowded and a shakeout was imminent, they didn't agree as to what types of online traders would be left. One thing was clear: there will be more announcements from companies and independents setting up energy online trading capabilities.

So, it came as no surprise for the panel to hear that one of the larger online trading consortiums, IntercontinentalExchange, "The ICE," made up of seven U.S. and European financial institutions and diversified energy and natural resource companies, announced last week that it had begun trading natural gas and power online. Its natural gas and power products include physically delivered gas at fixed and indexed prices, natural gas basis and swing swaps and firm power. Intercontinental only went into business in March (see NGI, March 27).

Frank Getman, CEO of HoustonStreet Exchange, said that for companies like his and Intercontinental to survive, they have to offer an open platform, allowing all competing online traders access to information, which increases efficiency for customers. HoustonStreet's neutral online trading platform has strategic alliances with, among others, EnronOnline, Conoco, Equiva (the U.S. trading arm for Shell, Texaco and Saudi Aramco), Sithe Energies, Inc., Williams and Vivendi (see NGI, July 17).

"Interconnectedness is a harbinger of the future of online exchanges," said Getman. "Liquidity had become a commodity." And liquidity is the ticket to enter the online trading arena, he said.

Altra Electronic Trading Services' success is keyed to "metamediary" strategies said vice president Dixie Barrett. Altra, an independent platform, offers complete anonymity to its traders, and its strategy appears to be working. Last Tuesday, she said Altra traded 4.2 million MW hours online, and has traded 45 MM MW hours this year.

In the long term, consortiums, unlike independents such as Altra, will struggle with a variety of growth and stability problems because of the complexity of the players involved in them. Still, she said, that wouldn't discourage companies from doing whatever they can to get into the business.

"Why would anyone want to be in it?" she asked. "Well, the business is going to grow to around $266 billion by 2004. That's a pretty good reason." One thing that online traders have to do to be successful is to remember the customer on the other end. Referring to the 1980's Megatrends bestseller, Barrett said that companies can be high tech, but they've also got to be "high touch."

Barrett said that people want to do business with people, and that's how we maintain relationships." Though the growing industry remains in a "wait and see mode," she said that bottom line, successful portals will give the customers what they want through value-added services.

RedMeteor CEO Vincent Di Cosimo thinks the key to online trading will be how companies move toward depth in the marketplace. "Customers want to have a minimum amount of clicks. Three clicks, three seconds, you're done. That's real time trading here. And those companies that last have to migrate to that to remain in the game."

Still, he predicted more of the larger companies have yet to be seen in the arena.

"There are some giants out there that have sat on the sidelines and have yet to enter the marketplace. We're watching and keeping an eye on that issue." Di Cosimo is not wishy washy about online traders who will be around either. "Right now, there are about 24 exchanges. In six months, it will be down to single digits."

Dave Sharp, vice president of e-commerce for Coral Energy LLC, a Shell affiliate, said the Coralconnect trading platform was launched with customers' input. "We wanted to be the easiest energy company to do business with," he said.

As the marketplace shook out, Coral decided to change its direction slightly, and now has partnered with energy companies Dominion, Dynegy, Koch, TXU, Williams along with eSpeed and broker Cantor Fitzgerald to offer TradeSpark, an online trader that began operations earlier this month (see NGI, Oct. 2).

"We believe consortiums are the way to go," Sharp said. "It's important to be neutral, and this platform offers a single point of liquidity."

Carolyn Davis, Houston

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