FreightWaves, Nodal Exchange, DAT and ABInBev hosted the seventh Freight Futures Road Show in St. Louis on Wednesday, February 27. The show introduced transportation and logistics leaders to Trucking Freight Futures.
FreightWaves, in conjunction with DAT and Nodal, has created the first-ever Trucking Freight Futures contracts, which are set to debut March 29.
Trucking is a boom-and-bust industry with volatile pricing and frequent imbalances between demand and capacity. FreightWaves CEO Craig Fuller was inspired to create Trucking Freight Futures contracts as a way to help transportation companies protect themselves against downturns and allow shippers to more accurately forecast transportation budgets.
Seven origin/destination lane contracts will launch, along with four regional or national average contracts. Trucking Freight Futures will be settled against dry van spot rates.
Los Angeles to Seattle
Seattle to Los Angeles
Los Angeles to Dallas
Dallas to Los Angeles
Chicago to Atlanta
Atlanta to Philadelphia
Philadelphia to Chicago
West U.S. (Los Angeles to Seattle Van and Seattle to Los Angeles)
South U.S. (Los Angeles to Dallas and Dallas to Los Angeles)
East U.S. Van (Chicago to Atlanta and Atlanta to Philadelphia and Philadelphia to Chicago)
National U.S. (West U.S. and South U.S. and East U.S.)
At the St. Louis Road Show, the audience was comprised primarily of freight brokers. While shippers are naturally “short” in the market, meaning their profits fall as prices rise, and carriers are naturally “long,” meaning their profits climb as prices rise, intermediaries like brokers need to understand both sides of the equation.
“In the intermediaries scenario, you basically have two streams of business,” said Tom Mallon, FreightWaves Vice President of Futures Markets. “One is protecting your margins, and the other is protecting your cost. When protecting on the cost side, you look like a shipper… but on the other side, you’ve got exposure like a carrier.”
A handful of people in the audience were familiar with futures trading already, and their questions reflected that.
Ed Dworkin, Director of Business Development at Logistic Freight Solutions, asked about liquidity and whether or not there are market makers in place that are ready to start making markets from day one.
“We’re in discussions with market makers, both from the industry, particularly a couple of 3PLs [third-party logistics providers] that are interested in making two-way markets, and also professional futures traders who see the opportunity and are willing to stand in the marketplace and make that two-way market,” FreightWaves Executive Director of Futures Addison Armstrong said.
In a related question that has come up at several Road Show stops, Sheer Logistics Technology and Solutions Vice President Rob Cook asked about potential bid-ask spread.
“Typically, when there is a new contract, the bid-offer spread will be quite wide, but as you attract liquidity the bid-offer spread comes in,” Armstrong said. “We understand that, and in our role marketing this product, along with our partners at Nodal, we are very keen to have market makers. We know that is going to be important. In terms of sensing how wide it is going to be from the start, it is very, very difficult to tell.”
The bid-ask spread is the difference between how low a seller is willing to sell and how high a buyer is willing buy. The spread tends to narrow when volatility is low and widen when volatility is high.
“When we looked at volatility, we looked at where spot rates were in June of last year, and where they are now. [They are] dramatically lower,” FreightWaves Chief Revenue Officer George Abernathy said. “If I had some freight that I was managing, I might actually try to take some of it out to the spot market. Some of those spot rates are actually lower today, whereas the spot market was absolutely what you wanted to avoid for most of 2018. When you’re in the intermediary world, you want to think like a shipper sometimes and sometimes like a carrier. You have the ability now to look and see what is happening.”
The presentation seemed to pique the interest of several audience members, who were intrigued by the idea of sidestepping some of the risk inherent to the trucking industry.
“What [FreightWaves] has built is fantastic,” ODW Logistics Supply Chain Finance Manager Steve Snodgrass said. “It presents a tremendous opportunity to mitigate risk. It is just a matter of learning more and getting more comfortable with it.”
To learn more about futures or access the video and slide deck from one of the Road Shows, click here.