Baltic Exchange woos brokers with stock to up ship futures trade
The Baltic Exchange began offering share incentives to brokers this month to attract more trades in dry freight derivatives on to its trading platform, which is losing money as the shipping sector slumps into a fifth year.
Volumes have remained low on the Baltex multilateral trading facility since it started in June 2011. It is the first central electronic marketplace for freight forward agreements (FFAs), which enable investors to take positions on freight rates at a point in the future.
â€œWe recognise the brokers are the key source of liquidity in the FFA market, and we have always known that and respected it. We have not yet succeeded in getting significant broker support onto the system,â€ Baltic Exchange Chief Executive Jeremy Penn said.
The exchange has launched an equity earn-in plan in which brokers who put trades through Baltex earn share warrants in the London-based exchangeâ€™s subsidiary, Penn said.
â€œThe plan says to brokers, â€˜If you contribute to the success of Baltex, then you share in it financiallyâ€™,â€ he said.
Seven brokers offer trading in dry FFAs. Five of them â€“ Clarksons, FIS, SSY, GFI and BRS â€“ have signed up to Baltex, while ICAP and Banchero Costa have not.
Brokers, who have been trading FFAs by phone or on three screens of their own, fear that the use of Baltex will lead to a loss of commission business.
â€œDespite efforts by the Baltic to increase support for Baltex amongst both users and brokers, the fundamental issue remains the same for our member companies â€“ the ability for the traders to transact directly without a broker,â€ said Ed Radcliffe of the FFABA brokersâ€™ association.
â€œOnce the liquidity pool is on that screen, the incentive for a client to use a broker diminishes.â€
â€œIf you want to develop trade in a derivatives market where the participants by their very nature are cautious and secretive, you will have a huge job getting them to put their best prices on a central screen,â€ one FFA market source said.
Another said: â€œNo one is in a great hurry to execute on Baltex.â€
SHRINKING MARKET HURTS
The entire FFA market has shrunk, furthermore, as the dry bulk shipping market has suffered one of its worst and longest ever downturns. Owners had ordered large numbers of new vessels between 2007 and 2009, just in time for the collapse of the global economy after the 2008 financial crisis.
The dry FFA market, which had grown to an estimated value of $150 billion in trades in 2008, fell to around $8 billion to $12 billion last year, according to market estimates.
â€œThey (the exchange) have been caught by the overall lack of liquidity and volume in the market. Volumes have not really recovered (since 2008),â€ said Nikos Nomikos, a professor in shipping risk management at Londonâ€™s Cass Business School.
Baltex, which does not provide figures on trading volumes, posted a loss of 704,166 pounds ($1.1 million) in the year to end-March 2012.
Results for the year to March 2013, due shortly, will show n said that Baltex was â€œstill running at a lossâ€, Penn said.
Nevertheless, the London-based Baltic Exchange, the hub of the global shipping market since its founding in 1744, is pressing on with trying to expand Baltex.
So far, 33 principals have joined Baltex including trading houses and banks such as Bunge, Cargill International, Citigroup Global Markets, Glencore International, Merrill Lynch, Morgan Stanley, Trafigura and Vitol.
â€œBuilding liquidity on electronic markets is a slow process. We have not got there yet,â€ Penn said.
Source: The Shipping Tribune â€“ 24 May 2013
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