features information services physical benchmarksin line world startup line commodity exchanges seem realize several good reasons benchmarks derived volumetric indices may work may useful physical products oil petrochemicals routes price discovery neil fleming apr 1 2001 global energy business page 37 copyright 2001 mcgraw hill inc somewhere near 500 internet based exchanges energy oil petrochemicals hydrocarbon shipping launched worldwide past two years since folded acquired interesting note virtually exchanges survivors deceased two things common created scratch entrepreneurs technology world industries exchanges intended serve businessmen women behind followed train thought concluding line trading business could succeed train thought broken four parts premise 1 line trading efficient save participants money premise 2 capture savings site revenue premise 3 site best site everyone use premise 4 liquidity construct benchmarks benchmarks unimpeachably scientific replace existing unscientific benchmarks currently used industry result make even money become information provider article examine premises limits inherent logic view showing 500 launched exchanges survive particular show logic premise 4 valid markets physical commodities oil petrochemicals premise 1 line trading efficient would question theory electronic trading potential make liquid markets much efficient history enrononline probably successful electronic energy trading system world today supports view according enron enrononline succeeded raising number transactions completed market makers average 672 1999 3 084 last year lowering marginal cost per transaction 75 two year period however markets enrononline predominantly serves two liquid homogeneous energy business natural gas electricity moreover exchange achieved efficiency gains using model different deployed available line exchanges essentially enron used line trading extend complement existing line trading business enron focus remains transaction rather transaction system contrast majority transaction platforms physical commodities interlopers operators assume commodities traders willing depersonalize business complex transactions executed humans electronic system deals faster anonymously least theory players assumption risky one largely based buyer perception marketplaces operate fails take account concerns physical commodity sellers importantly producers typically producers wish ensure uptake commodity continuous minimizes volatility commodity price relationships become important conditions relationships hardly enhanced electronic dealing quote november december 2000 issue harvard business review suppliers want anonymous contestants ruthless bidding wars premise 2 make money selling gains efficiency logic underlying premise 2 potentially seriously flawed doubt market participants prepared pay efficient services electronic trading nature forces driving physical energy commodity markets casts doubt whether trading system long term make profit charging per transaction fees although era competition beginning clear pressure transaction fees already downward remain direction even number participants exchange shrinks handful energy business potential efficiency gains percentage total industry cost simply great example research done platts division mcgraw hill companies new york indicates total potential efficiency pool oil industry 150 million year even 10 businesses try carve profitable enterprise pool would hard pressed businesses would even harder time turning profit competitors using per trade revenue model particular sites operated market participants enrononline tend charge nothing per trade business models seek profit commissions transactions rather transactions implication seems likely exchange able make money owners sell something else clearing facilities back office integration information decision makers premise 3 site best capture market liquidity available statement essentially says given enough marketing support site change trading patterns industry capture liquidity fallacy logical problem premise clear one yet developed trading software package clearly superior others best site really means liquid site pre condition capturing liquidity site must already liquid site startup exchanges attempted solve problem insisting participants make volume guarantees volume guarantees conflict directly traders focus profits trading businesses tell traders sacrifice profits sake common good playing risky game common good means lower trading profits traders simply leave greener pastures become best site site must somehow find way bootstrap liquidity perhaps offering substantial non volume related incentives efficiencies users however paradox sites revenue models depend almost exclusively volume premise 4 capture lots liquidity build benchmarks premise startling ways flawed four raises many serious questions answers invalidate model worse questions highly theoretical making persuasive answers even harder come among questions much liquidity enough indexes volumetric averages make good physical benchmarks trading site benchmark bid offer range trading site generate close last least benchmark anyway benchmarks indices benchmark price series prices market participants agree use basis determining prices useful benchmarks good indicators transactable value benchmark allows market participants determine price buy sell commodity benchmarks typically used complex markets multi dimensional variables arbitrage oil example benchmark pricing grown around need compute relative values differing commodities across time geographical distance commodity type degree one commodity may substituted another common error however believe markets use liquidly traded commodities benchmarks although liquidity major asset benchmarks many markets use illiquid benchmarks whose characteristics outweigh liquidity advantage include market transparency free open availability commodity absence political partisan control commodity absence delivery restrictions size end user market commodity consumed example although physical volume dubai crude oil actually produced tiny nonetheless used key benchmark asia unlike persian gulf competitors crude oil characteristics one way compute commodity benchmark price strict indexation process constructing price marker volumetric average concluded business however process little chance producing useful benchmark unless contributing volumes high reflect sufficient number trades index little statistical validity indication transactable price represents problem benchmarking oil prices whether crude products 77 million barrels crude produced worldwide day vast majority sold long term contract market leaving perhaps little 10 traded spot reality figure boosted multiple ways primarily transaction chaining repeated selling cargos even assuming threefold transaction growth result electronic trading still perilously low used valid basis strict indexation especially considering great diversity crude oil specifications around world many crude oils trading basis establishing price transactions per month even liquid benchmark crudes basis typically handful trades per day oil markets however seem care example settlement basis international petroleum exchange brent crude oil futures contract index based smattering physical trades taking place day expiry acceptance indexation mechanism difficult prerequisites include open participation mechanism perceived existence level playing field existence comparative historical data achieving buy market dominant players nature today line exchanges makes conditions hard meet everyone uses exchanges may owned industry players typically little historical data daily volume fluctuates wildly major players commitment either fragmentary compromised volume commitments today environment chance index able gain market acceptance benchmark extremely slim strict volumetric indices useful another big question surrounding volumetric indices useful benchmarks physical commodities advocates indexation argue statistical methodology helps eliminate market distortions caused example market closes addition argue alternative approach market assessment based human judgements transactable prices subjective relied determine benchmark prices indexation proponents argue eliminates subjectivity practice however argument pass test even system indexation succeeds taking judgement determination market prices prevent attempts distort index exploiting rules system based many markets human judgement effective defense market plays whose goal profit price transparency even highly liquid markets example monthly natural gas market u indices generated information companies like platts subject human review analysis generation platts market specialists undertake string comparative tests unearth potential distortions reported prices whenever distortions become apparent platts editors investigate market necessary eliminate certain trades assessment picture good reasons diligence volumetric index manipulated volume plays players cloak anonymous dealing selective trading hedging one marketplace trading another figures 1 2 illustrate players exposure particular price buy side might actually manipulate volumetric index lots business early day market rising skew volumetric average day lower figure 1 market falling reverse pattern shift transactions late day pushing market figure 2 players consistently impact index considerable time potentially serious problems indices index theoretical construct rapidly moving market manifest lag become useless market participants seeking answer question price buy sell indeed index may even actively mislead people asking question example fast rising market index generated course one day significantly opening market price following day creates impression prices somehow moved overnight whereas fact may moved perhaps biggest problem indices relates use heavily interlinked markets prices constrained complex spread arbitrage values description applies energy markets particularly apt today global physical market oil markets spread relationships important outright prices process generating averaged indices tends generate sets prices reconciled figure 3 depicts dramatized version problem price 1 price 2 interdependent always 5 cents difference however volume pattern day trade shown lower part figure price 1 high volume early day price 2 enjoy volume boost later result contrary market reality volumetric averages price 1 price 2 say differ 1 cents routes price discovery line trading system generate reliable benchmark index routes price discovery yes two first benchmark bid offer range second use close kind bid offer ranges widely used market measurement tools platts others however automated application bid offer ranges pursuit scientific benchmarks fraught difficulty happens bid offer offer bid rules written discriminate market bid market one system decide bid offer timing representative typical market line exchanges even begun answer questions best offer users last bid last offer price range accidentally distort perception market two aligned time turns example last bid actually withdrawn response last offer exchanges implicitly acknowledging creating useful benchmarks difficult tried incorporate transactions bid offers published benchmarks obviously hope system attract liquidity tied traditional benchmark safe say publisher interested incorporating exchange proprietary markers transaction bid offers open transparent line site benchmark close theory yes human hands brains intervene process longer mechanical one rather editorial judgement effort many obstacles one biggest closing prices work best two kinds markets completely open markets assessments derived surveying participants sole operator markets like futures markets traded instrument exists exchange physical commodities contrast traded across broad spectrum instruments sub markets would virtually impossible owner single sub market line exchange assert superiority close someone else build market acceptance price derived trading pool include players even system used players example oil industry derivatives trading intercontinental exchange would hard time convincing anyone rely exclusively closing prices also liquidity frequently low assure fact traded market close every day happens benchmark days one comes play conclusion appears price discovery may necessarily emergent property line trading systems may case creators line trading systems confused mechanism function trading systems neither new markets new marketplaces simply new vehicles participating existing marketplaces telephone also vehicle participating markets one expects phone able tell price commodity gebol 11600001 related topics dow jones topics publication global energy business news engl copyright 2001 dow jones reuters business interactive llc rights reserved