On President’s Day in Atlanta, FreightWaves, Nodal Exchange, DAT and K-Ratio hosted the companies’ fifth roadshow educating the transportation, logistics and finance industries about Trucking Freight Futures.
George Abernathy, FreightWaves’ chief revenue officer, began the presentation by recounting his experience in freight, including six years as the president of Transplace, and said that controlling costs while managing customers’ freight was a never-ending struggle. The pain and problems for both shippers and carriers due to volatile trucking spot prices led Craig Fuller, founder and CEO of FreightWaves, to conceive of the idea of Trucking Freight Futures as a way to de-risk the industry.
“We are empowering a freight community that’s struggling to deal with the risks and volatility of being exposed to the freight markets with data, insights and actionable tools,” Abernathy said.
Abernathy went through the addressable market by the numbers – trucking transportation in the United States is an industry worth in excess of $725 billion annually, and the prices for trucking freight are quite volatile, subject to unpredictable supply and demand shocks. Even a price paid to a truck to haul freight between the same origin-destination pair might go up or down 60 percent in a matter of months.
The long tail of industry participants with natural exposure to the trucking spot market was telling – Abernathy explained that there are more than 4,500 trucking companies with at least $20 million in revenue, there are 20,000 shippers that spend more than $10 million annually on freight, and there are an estimated 1,600 freight brokers with at least $10 million revenue per year.
This ‘long tail’ of potential freight futures traders should help bring liquidity to the market and ensure that no one company can set prices unilaterally. On the other hand, it may prove a challenge to educate small trucking fleets – 90 percent of which have 10 trucks or less – about futures contracts and how they work. One road show attendee asked how those small shippers and carriers could participate in the market.
Kyle Lintner, principal at K-Ratio, a firm offering shipper and carrier customers advice, strategy and even management of freight futures contracts, answered the question by pointing to small farmers. Small farmers sell agricultural goods and face price risk, but they don’t meet the financial requirements necessary to participate in futures exchanges by themselves. Instead, they form co-ops, pool their resources and hedge their risk together. Lintner said that Nodal Exchange is working on its draft rules to make that possible in Trucking Freight Futures.
Of all of the Trucking Freight Futures road show events to date, the Atlanta show elicited the most sophisticated questions from the audience. Those in attendance were mostly medium- to small-sized shippers looking for ways to protect themselves against freight market volatility and representatives from the finance industry.
One attendee wanted to know what the anticipated bid-ask spread would be when the contracts begin trading on March 29. The bid-ask spread is the difference between the largest amount a buyer is willing to pay for a security and the lowest amount a seller is willing to accept. Addison Armstrong, executive director of futures at FreightWaves, responded that there was no way to know what the number would look like now.
“I’ve seen a few launches,” Armstrong said, “and it’s typical when these products launch that the bid-ask spread is quite wide. No one wants to make a price that’s too easily picked off, because then it means they’re wrong.” Armstrong went on to say that as the market begins to establish consensus the bid-ask spread should tighten, making it easier to get in and out of any given position.
Bascome Majors, a transportation equities analyst at Susquehanna, asked “How long will it take for liquidity to come in and the spread to get more stable?”
“We expect a handful of liquidity providers to make markets on day one,” said Tom Mallon, FreightWaves’ vice president of futures markets. “When do you know if a contract is successful? Nodal’s experience with electricity suggests 18 months or so before a significant upturn in volume, and that comes from participants identifying use cases, something structural in the market, or an event where one company is able to protect itself with futures and that becomes known.”
One attendee said that he grasped the arbitrage opportunities for intermediaries, but didn’t understand how shippers would participate.
“Those who are already trading will be first into that,” Abernathy said, pointing out that many shippers already hedge against the prices of the commodities they depend on, whether they are grains or metals or hydrocarbons.
Another attendee asked if volatility itself would ever be traded on the exchange, akin to “a VIX of freight,” as he put it.
“The answer is yes – although not on day one – but we feel that the natural evolution of product will lead to shorter duration products and options,” Mallon said.