A gang of heavy-hitters hopes to take global over-the-counter(OTC) trading of energy, metal and other commodities to a whole newballpark — the Internet, where liquidity is expected to be big.
Seven U.S. and European financial institutions and diversifiedenergy and natural resource firms are launchingIntercontinentalExchange, an Internet-based marketplace toinitially trade oil, oil products and precious metals, with gas andelectricity to come later.
The partners are BP Amoco, Deutsche Bank, Goldman Sachs, MorganStanley Dean Witter, Royal Dutch/Shell Group, Societe Generale, andthe Totalfina Elf Group. Based in Atlanta, the venture intends tobegin trading in a variety of petroleum and precious metals-basedOTC products later this year with plans to later develop additionalmarkets for other commodity products, including global natural gas,electrical power and a variety of base metals. There will be no”memberships” in the Exchange and no dues or fees beyond thoseincurred in the process of trading. Participation will be open toall commercial market participants, providing they can clear creditrequirements with trading partners.
Neal Shear, managing director of Morgan Stanley Dean Witter,said initially the service will be used by large metals market andenergy market participants trading with bilateral contracts. Creditrequirements are expected to be high.
IntercontinentalExchange will compete with EnronOnline, which wasstarted late last year (see Daily GPI, Oct. 27). Unlike the Enron model,Intercontinental will offer a choice of multiple sellers. Shear saidhis group’s business model will generate more liquidity. “We thinkthat their model, one person [Enron] serving many, is not the rightmodel. We think that many [sellers] serving many [buyers] is the rightmodel. This system will be open to as many participants that want toplay in this space… We think that the liquidity will besignificantly better on a business model like this.” An Enronspokesman did not return a call for comment by press time.
The seven founding firms, which are to provide the initialmarket liquidity to IntercontinentalExchange, are among the largestplayers in a broad array of OTC commodity products. For example,the top two or three spots in league tables for principals innearly every category of OTC energy derivative products are held bythe founding participants of IntercontinentalExchange. This willoffer market users heretofore unmatched access to the liquidityprovided by these significant market players.
The New York Mercantile Exchange (Nymex) said it had beenapproached by Morgan Stanley and Goldman Sachs for participation inthe Internet venture but declined the offer as the platform is “notfully consistent with its own strategic goals and desire to createa neutral forum for all participants,” the exchange said in aprepared statement. “The exchange is very close to announcing itsown initiative to aggressively bring the system it envisions to themarketplace and would welcome Morgan Stanley and Goldman Sachs inthis new venture along with all other interested marketparticipants.” Shear would not comment on the negotiations withNymex.
“This new B2B e-commerce portal promises commercial participantsin the commodities markets access to a more efficient marketplacethan currently exists,” said Gary Cohn, head of global commoditiesat Goldman Sachs. “The prospect of increased market efficiency inthe area of OTC commodity products is long overdue.”
Currently, the vast bulk of trading in the wholesale OTC energyand metals markets is conducted via telephone. The capabilitiesprovided by IntercontinentalExchange’s platform will offerincreased market transparency, liquidity and efficiency whilepreserving the anonymity most market participants require, thepartners said.
“The size and the corresponding needs of participants in thesemarkets are far larger than most people recognize,” said Shear. “In1999, the notional value of OTC commodity contracts was more than$1.8 trillion and growing rapidly. We have seen that in markets ofsimilar size, where electronic systems have already beenimplemented, market quality has improved and operational costs havebeen significantly lowered for customers.”
Beyond establishing electronic markets, IntercontinentalExchangewill create the opportunity for the “paperless back office” throughstraight-through processing of trade information for OTC products.IntercontinentalExchange also plans to develop facilities whichwould permit market participants to clear and settle OTC products.
“We believe that market participants will determine whatfunctionalities are most important to them in this newmarketplace,” said Francois-Xavier Saint-Macary, head ofcommodities trading at SG Investment Banking, a division of SocieteGenerale. “The ultimate vision for this industry-focused platformcomes from the interactive dimension of the net. One could imaginethe ability to view OTC and futures markets on the same screen, aswell as to route orders to existing futures exchanges or to theirelectronic platforms, credit intermediation features and links tomany other industry related sites.”
The technological backbone for IntercontinentalExchange is arobust and scalable trading system. The system provides marketparticipants with global trading support around the clock andthroughout the business week.
IntercontinentalExchange is to be headed by Jeffrey Sprecher,previously president and CEO of Continental Power Exchange Inc.,the company that developed the trading system to be used byIntercontinentalExchange. “I believe that, just as financialproducts have quickly and efficiently moved onto electronic tradingplatforms, so too will commodity products. Energy and metals are anatural start, but not an end to this venture. My own experiencesin the natural gas and electricity markets and my understanding ofother established and emerging commodity markets suggest thatgrowth for this method of trading will be exponential.”
The Internet-based energy trading platform industry has experiencedsome consolidation of late. Last month, Houston-based Amerex NaturalGas Inc. and sister company Amerex Power Inc. bought the gas and powerbrokerages of Houston-based BTI brokers for an undisclosed price (seeDaily GPI, Feb. 29). Last year, Altrabought three different online brokerage firms, including its chiefcompetitor, QuickTrade (see Daily GPI, June29).
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