The lanes covering by Trucking Freight Futures contracts (Map: FreightWaves)
On Wednesday afternoon, at the Andaz Hotel on Wall Street in New York City, executives from FreightWaves, Nodal Exchange, DAT, and K-Ratio pitched Trucking Freight Futures to a diverse audience of investment bankers, equity analysts, hedge funders and techies. The event was completely booked. On Thursday, the Road Show heads to Chicago.
For a recording of the live stream and a copy of the slide deck, click here.
Michael Vincent, Executive Vice President at FreightWaves, welcomed the attendees and began the freight futures presentation by recounting his transportation and logistics experience. Vincent joined FreightWaves after more than 32 years in the industry including less-than-truckload, truckload, asset-light logistics services, maritime, air cargo and warehousing and distribution.
"In my past lives I have managed $150 million-plus transportation budgets," Vincent said, "and hitting those budgets throughout the year was a very difficult chore. I saw a lot of people lose their jobs over this exact problem."
Vincent went on to explain that the U.S. trucking industry was very large (more than $725 billion annually) and very volatile (multiple moves up and down in price exceeding 25 percent in a single year), but his former colleagues in the industry had no way to de-risk their exposure to price shocks. Not only is trucking very large and very volatile, but freight markets are also very sensitive to external factors.
"Virtually everything that happens affects the transportation industry, from the mere suggestion of a new tariff to hurricanes," Vincent said.
Recent advances in technology have connected assets on the road to cloud-based data streams, creating transparency into capacity flows and real-time market pricing. Meanwhile, recent price shocks both up (from the back half of 2017 through 2018) and down (the spot rate crash after the first week of January) underline the need for companies across the business community to hedge their natural exposure to freight market volatility. In The Wall Street Journal, articles about transportation costs were front page news.
Vincent pointed out that a successful futures contract needs a large and volatile underlying market (trucking), a benchmark index (DAT), an exchange and clearing house (Nodal), and market data, news and insights (FreightWaves).
Next, Nodal's Senior Director of Energy Markets, Daniel Gomez, spoke about the mechanics of the exchange and the surety that traders of Trucking Freight Futures contracts would have.
"Nodal launched in 2009," Gomez said, "with a mission to create new and innovative risk management tools for the power markets." Now Nodal Exchange is the second-largest power exchange in the world and manages about $19 billion of open interest, representing 33 percent of the open interest in tradeable power in the world.
Electricity or power markets are similar to trucking for several reasons – it's a perishable commodity that flows through geographically defined grids and is subject to both unpredictable and seasonal volatility in demand. Gomez also explained how Futures Commission Merchants (FCMs) work to ‘clear' trades on commodities exchanges by guaranteeing performance and removing counter-party risk.
Tom Mallon, FreightWaves' Vice President - Financial & Trucking Freight Futures Markets, outlined the Trucking Freight Futures' contract specifications for all 11 lanes/contracts (seven origin/destination pairs, three regional baskets and a national average). Mallon said the lanes were chosen because they were high volume and correlated to about 84 percent of all truckloads moved in the country.
Finally, Kyle Lintner, Director of Markets at K-Ratio, explored some use cases for Trucking Freight Futures. Shippers have the opportunity to turn variable costs into fixed costs, while carriers have the opportunity to turn variable revenues into fixed revenues. Third-party logistics providers can play both sides of the market. Brokers might short the national average until RFP season is over and their contract rates are locked in, and then take a long position to cover themselves in case spot prices move upward.
After the presentation and Q&A session, the presenters and audience members gathered for a networking cocktail reception. An executive of a digital freight brokerage start-up wants to offer his shipper customers guaranteed spot rates in advance, and needs a way to protect the company from price volatility. The CEO of a quantitative hedge fund told FreightWaves that he was very interested in the forward curves Nodal would publish twice daily.
Institutions and companies attending the Wall Street Trucking Freight Futures roadshow included ADM Investor Services, Black Gold Investors, Carggo, CargoMetrics, CNBC, JP Morgan, McCarter & English LLP, NatWest Markets, Opto Capital Group, Raymond James, S&P Global Platts, Skinner Capital and many more.
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