Resale Channel: Capacity Trading Finds Pooling Interest

Posted: 06/2000

Capacity Trading Finds Pooling Interest
By Khali Henderson

Commodity trading of communications capacity is moving quickly from cyberspace to the physical realm as parties are pooling their interests to create standards and neutral interconnection, leaving some eyeing a telecom derivatives market as early as next year.

Recognizing that the exchange model would compete with and, over time, possibly replace the traditional proprietary wholesale bandwidth and minutes market model service providers use today, the Telecommunications Resellers Association
(www.tra.org) has created the Communications Trading Industry Council to help educate and inform the association’s 800-plus members on developing bandwidth and minutes trading markets.

Interestingly, the new council is being co-chaired by board member Ron Harden, COO of PointOne Telecommunications Inc.
(www.point-one.net), who was formerly a vocal opponent of the exchange model while vice president of marketing at Williams Communications Group Inc.
(www.williamscommunications.com). Williams recently did an about-face, announcing in February plans to be a leader in setting standards for trading (see PHONE+ April, page 23).

TRA’s new council initially will not be engaged in standards setting, but in information sharing, according to President Ernest B. Kelly III. Its first ad hoc meeting was expected to take place at the organization’s spring conference in Philadelphia May 8-11.

Also at the request of its members, the Competitive Telecommunications
Association (www.comptel.org), has joined forces with Risk Publications
(www.riskpublications.com) to determine the feasibility of forming a nonprofit association for bandwidth/minutes traders that would be charged with setting trading standards and enforcement procedures.

As a follow-up to Risk’s successful gathering of international telecom carriers interested in participating in such a group in January, CompTel represented it members at a March briefing sponsored by Risk in Washington. A meeting was set for May in Tucson, Ariz., to reach a final decision on the question.

A similar group, the Association for International Telecom Dealers
(www.aitd.org.uk), was formed in December and received initial support, particularly from online trading floors and brokerages. The group’s charter is to be a global membership organization for international telecommunications traders and service providers. It aims to define and establish a common platform for international telecommunications trading, to lobby on the industry’s behalf, and to establish a central reference for standards and data.

Although AITD claims it attracted many founding members and that the New York Mercantile Exchange played host to its meeting, response to its coming out was not all good. AITD was faulted by some for being led by the investment community rather than by carriers.

Meanwhile, Telecom Cyber Exchange operator Commerex.com Inc.
(www.commerex.com) has taken matters into its own hands by forming a nonprofit association for traders on its exchange, which opened at the end of March. The group of carriers, called the Communication Clearing House Association
(CCHA), runs the exchange by establishing rules for membership and trading practices.

Neutral Nexus

Enron Broadband Services Inc.
(www.enron.net) proposed in May 1999 a framework that basically calls for standardized contracts, neutral pooling points between city pairs and a pooling point administrator. This would allow buyers and sellers to easily and efficiently match their needs on four points: price, capacity, contract length and
QoS.

Toward this shared vision, telecom industry attorney, entrepreneur and founder of Advanced Radio Telecom
(www.artelecom.com) Ted Pierson formed the Washington, D.C.-based LighTrade Inc.
(www.lightrade.

com) in September to construct neutral pooling points for bandwidth trading.

In March, the company formally announced an agreement with Lucent Technologies Inc. (www.lucent.com) valued up to $50 million to create a new network using optical networking products such as Lucent’s WaveStar BandWidth Manager, which serves as a lightwave traffic cop.

By third or fourth quarter, LighTrade Vice President of Strategic Relations Michael Prior expects to have eight sites operational in the U.S. cities of Atlanta, Ga.; Chicago, Ill.; Dallas, Texas; Denver, Colo.; Miami, Fla.; San Francisco/San Jose, Calif.; Seattle, Wash.; and Washington, D.C. In 2001, LighTrade plans to have points in Boston, Mass; Houston, Texas; Las Vegas, Nev.; Memphis, Tenn.; and Phoenix, Ariz., in the United States; and globally in Frankfurt, Germany; Hong Kong; London, England; Milan, Italy; Paris, France; and Tokyo, Japan.

Prior says he expects trading between city pairs using the neutral pooling point model to begin weeks in advance out of habit, but they quickly will be reduced to days and minutes.

“LighTrade is bringing to the equation the ability to do real-time provisioning of trades and monitoring of quality,” Prior says. LighTrade does not want to match trades, but to take orders for such contracts, and it is in discussions to do so with companies that already have online trading platforms.

Logically, however, many of the online trading floors are constructing their own network on neutral pooling points.

In April, the Global TeleExchange Inc.
(www.theGTX.com) announced the opening of the New York, N.Y., United States, and London exchange points on its Virtual Real-Time Exchange
(VRTX), a carrier-neutral system for originating and terminating excess minutes and other telephony applications on the collective networks of telecom wholesalers. Earlier, GTX had announced an agreement with Equinix Inc.
(www.equinix.com), creator and operator of the neutral Internet Business Exchange
(IBX) centers, to deploy exchange points in Equinix IBX centers. Additional exchange points are planned to be operational in the latter half of the year in key cities throughout North, Central and South America, Europe and Asia.

GTX trading members execute trades anonymously within three minutes to lease and/or sell on GTX’s Internet-based trading floors. Bank of America settles all trans-actions within three days of initial order execution by debiting or crediting the trading member’s brokerage account.

While the facilities-based exchange is being deployed, GTX offers its trading members more than US$6.8 billion in communications products (bandwidth, collocation, minutes, local loop, dark fiber, rights of way, and reverse and upward auctions) over its Agent X System of Online Trading Floors.

Another newcomer,
Commerex.com, launched its minute exchange and clearinghouse at the end of March with PoPs in Los Angeles, Miami and New York City. It is leasing from switch partitioning vendor General Telecom
(www.generaltele.com). Bandwidth trading is expected to be added later.

Commerex’s Telecommunications Cyber Exchange features independent cash and credit management through Brown Brothers Harriman
(www.bbh.com) and, as mentioned earlier, the carrier-led nonprofit administrative body called the Communications Clearing House Association.

“The CCHA will run the exchange, establishing rules for its membership and trading practices,” says President Richard Kates.

Members of the CCHA also will establish their own connection to General Telecom facilities, open an account with BBH and post partial commitment for purchase or sale. “Members selling minutes must prove they have the inventory to deliver them when purchased, while members purchasing minutes must prove they have the traffic requirements to use them,” Kates says.

London-based Band-X Ltd.
(www.band-x.com), the first Internet-based exchange for buyers and sellers of wholesale bandwidth and related services, announced in May that it will replicate its successful formula in the United States. Jamie Martino, who has been recruited to head up the U.S. subsidiary, Band-X Inc., says the company plans to deploy switches in five U.S. cities within the next 10 months to facilitate carrier interconnection to its real-time switched minutes and IP-routed exchanges. The first POP will be in a New York City carrier hotel, but Martino says Band-X has not yet determined at which address. The parent company operates a switch at London’s TeleHouse as well.

Meanwhile, RateXchange Inc.
(www.ratexchange.com) officially launched its Real-Time Bandwidth eXchange
(RTBX) in early February. The initial products available for trading on the exchange include one-month spot and one-year forward contracts for telecom capacity between neutral hubs at carrier hotels in Los Angeles and New York. Trading on RTBX offers buyers and sellers anonymity and a standardized contract that incorporates credit, settlements, delivery and billing.

The company announced in April agreements with COLO.COM
(www.colo.com) and Switch & Data Facilities Co.
(www.sdfc.net) to use their collocation facilities to deploy RTBX delivery hubs more quickly to more markets. By the end of this year, COLO.COM expects to have more than 40 facilities operational. S&DFC recently expanded its national footprint to 28 cities; by year-end it intends to have 40 collocation sites operational with an additional 70 planned for 2001.

RateXchange expects to add 10 U.S. and four international hubs by the end of the year. RateXchange, initially, is trading three routes from hubs at carrier hotels at 60 Hudson St. in New York, One Wilshire Blvd. in Los Angeles and TeleHouse in London.

Toward Liquidity

RateXchange President and COO Ross Mayfield says RateXchange purposefully locates its pooling points at the carrier hotels where the market exists today.

“This contributes to the liquidity of the market because it reduces time to interconnection,” says Mayfield.

Price transparency also contributes to market liquidity. One trading floor, Bandwidth Market Ltd.
(www.bandwidthmarket.com), announced in December a catalog of bandwidth prices for more than 300,000 circuits. The bid-ask site uses a search engine to sort offers and bids by city of origin, destination or speed of circuit.

But broker Mike Moore, managing director of Amerex Bandwidth and a partner in Amerex
(www.amerexenergy.com), an energy commodities brokerage, questions the validity of this data. In his experience, more than a quarter of a million market indicators is unmanageable.

RateXchange and Dow Jones Newswires, a unit of Dow Jones & Company
(www.dj.com), planned to launch May 1 indices measuring bandwidth pricing. The Dow
Jones-RateXchange Bandwidth Indexes will initially index rates for three global bandwidth routes. The composite indices are based upon volume-weighted contract prices offered to wholesale customers as collected from the
RTBX. All prices (in U.S. dollars) will be updated weekly and published though Dow Jones Newswires’ real-time news products and RateXchange’s websites. Dow Jones Newswires already publishes more than 30 indices that benchmark wholesale electricity prices in the United States and Europe.

“The additional transparency provided by standard industry indexes further accelerates trade by resolving the friction of pricing,” says RateXchange Chairman and CEO Don Sledge.

Future Options

Price transparency and liquid pooling points are requirements for moving bandwidth trading beyond physical trades to financial instruments. Another, says Michael Gooch, president of GFInet, a holding company with 46 percent interest in Commerex.com, is enforceable contracts (e.g., SLAs) like those in energy markets.

“With electricity, I expect it to be there when I need it. In telecom, if [my carrier] doesn’t have bandwidth, I get a busy signal. The future will be that I will not expect a busy signal. When that kind of commitment exists, we can have a derivatives market,” Gooch says. He adds that prices will not be able to continue their downward trend when demand exceeds availability and a carrier must meet a 100 percent SLA. In that instance, carriers will have even greater need to hedge the risk of price volatility, creating the opportunity for speculation.

Gooch predicts that such a state is 18 months away. “It’s going to take a while for there to be a fully liquid telecom market,” he says.

In anticipation, however, Commerex.com is talking to several existing commodities exchanges, such as the Chicago Mercantile Exchange, about clearing bandwidth futures contracts traded at Commerex Telecom Cyber Exchange. Unlike the current communications exchanges with neutral clearing/settlement functions operated by Commerex, GTX and RateXchange, these trades would be guaranteed by the commodity exchange. “It’s the next step to creating a futures market,” Gooch says.

Others also are anticipating the evolution to a derivatives market. Following the lead of fellow energy brokers Sakura Dellsher Inc.
(www.sdinet.com) and Amerex (www.amerex.com), Chapel Hill Brokers
(www.chbrokers.com) formed a bandwidth brokerage in early March. Chapel Hill Broadband Inc.
(www.chbroadband.com) plans to open its financial trading desk June 1, and is preparing for what its president, Brent Wilkins, characterizes as a logical evolution of the commoditization of bandwidth. Using new software released in April for use with energy derivatives by its parent company, the bandwidth broker expects to begin trading bandwidth options in the next six to 12 months, Wilkins says.

In the interim, the company will be matching buyers and sellers of dark fiber and wavelengths, claiming to already have signed broker agreements with a number of
counterparties. On April 12, it announced a completed transaction, securing dark fiber and collocation space for CLEC Madison River Communications
(www.madisonriver.net).

“Chapel Hill Broadband’s immediate goal will be to become the leading broker of physical broadband products and to be well positioned when the market develops financially traded forward and options contracts,” says Wilkins.

Khali Henderson is editor-in-chief for
PHONE+ magazine.