Trading Post
Trading Post
Q: What is the role of the OTC broker?
A: One of the emerging players in the bandwidth commodity trading market is the over-the-counter (OTC) phone broker; a middleman whose function is to find counter-parties for its customer’s trades.
The broker is much like a marketing subcontractor, searching through the marketplace for the most price-competitive and creditworthy counter-party for its client. When a suitable counter-party is found, the two counter-parties are introduced or matched verbally over the telephone. The transaction is confirmed at that time as the broker notes to both parties the details of the deal. The counter-parties consummate the transaction directly, as if they had contacted each other themselves.
Q: Does the broker represent its client by name?
A: The broker will search for a buyer or seller of bandwidth while maintaining its client’s anonymity. When bids or offers are stated through the broker, the company names behind those prices are not revealed. It is only when buyers and sellers are matched that their identities are revealed to each other.
Q: Does an OTC broker facilitate delivery?
A: The broker maintains no responsibility for physical delivery or receipt of bandwidth and most importantly does not act as counter-party to the transaction or guarantee performance. Upon matching counter-parties, the broker will fax or e-mail a deal confirmation, which again states the details of the transaction. For these services, the broker charges a fee to both counter-parties, which will typically be a percentage of the transaction amount.
Q: How does an OTC broker assist in marketing?
A: It is the broker’s job to maintain relationships with as many creditworthy companies as possible. In so doing, the broker provides itself with a large arena of potential counter-parties. Using these contacts, the broker is consistently scanning the marketplace for the most competitive buyers and sellers of bandwidth. For companies that can use additional marketing manpower, the broker plays this critical role. One call to a broker may be the equivalent of 50 or more counter-to-counter-parties. This, in turn, creates greater market depth and price transparency.
In addition, the broker is available to consult and advise, to provide insight on market conditions, and to provide value that extends beyond hitting a bid or lifting an offer.
Q: How is the broker paid?
A: As a subcontractor, the broker is paid per deal rather than salaried full time.
Q: Who assumes credit risk?
A: One function of a successful broker is to deal with companies whose credit ratings are ranked highly. Additionally, upon verbally matching counter-parties, the broker should state that the transaction is subject to counter-party credit acceptance. After counter-parties are matched, the responsibility of the broker is limited. As stated previously, the transaction is consummated as if the parties never used a broker at all. All future credit risk and performance risk becomes the responsibility of the counter-parties.
For small or medium-sized companies, it is sometimes the case that the broker can
assist in the credit acceptance process. The broker may educate potential counter-parties as to a client’s strengthened finance position or make counter-parties aware of potential guarantees or letters of credit when applicable.
Q: Who are OTC bandwidth brokers?
A: The brokers pushing the hardest for prominence in the bandwidth arena hail from the energy markets. The reason for this is twofold. First, it was the broker’s energy clients who, owning the rights of way along their pipelines, have laid fiber optic cable, creating the opportunity to trade. Second, it is the energy brokers who have dealt with deregulation before. They see the market in bandwidth progressing in the same manner as natural gas and electricity, allowing them to educate on the creation of a market and manage price risk.
Answers to this month’s Trading Post questions were provided by Jeff
Rosenzweig, first vice president, marketing and business development, for SDI Energy
(www.sdinet.com), and Ron Banaszek, manager, SDI Bandwidth Markets Group. SPI is a global OTC commodities brokerage firm. The authors can be reached at
jrosenzweig@sdinet.com or rbanaszek@sdinet.com.
Got a Trading Question?
All the talk and press about trading telecommunications capacity is sure to raise questions. That’s why PHONE+ has introduced a new column to address reader questions about this new market model. E-mail your questions to
phonplus@vpico.com. Answers to your questions will appear on our website within a few days, and the most common will be reprinted in a subsequent issue
of the magazine.
