OnExchange’s digitalDerivatives platform can already be used to handle many types of sophisticated b-to-b trading, but regulatory approval by the Commodity Futures Trading Commission will let it bring true futures trading to e-marketplaces, onExchange COO Ed Cuoco said.
E-marketplaces have paid lip service to such capabilities, though many have been more focused on survival in recent months than on reinventing how companies buy and sell. But it’s hard to deny the appeal of bringing these powerful tools to b-to-b markets.
"Potentially, they can unlock a tremendous amount of liquidity for e-marketplaces,” Cuoco said. "They can help buyers manage risk and hedge against a market swing."
For example, a buyer of bulk chemicals might purchase 50% of what it needs on contract and the rest on the spot market, including placing futures orders to avoid being slammed by wild price swings.
Sold once, sold twice
Derivatives trading—where options on products are sold and sold again—could push trading volume on e-marketplaces to a "five- to tenfold increase over the underlying cash markets," said IDC Inc. analyst Aaron McPherson.
If you run an e-market, that higher level of trading can be a major boon to the success of your marketplace. It also has the potential to change how companies buy key commodities, Cuoco said.
"Purchasing people and risk management people can work more closely, right on the Internet," he said.
OnExchange is the first exchange approved under the newly enacted Commodity Futures Modernization Act of 2000, the first fundamental overhaul of the nation’s derivatives laws in more than 25 years. The CFTC approved FutureCom, Amarillo, Texas, for Internet-based futures trading last year.
OnExchange is working with "five or six" e-marketplaces on adding futures trading and hopes to announce deals soon, Cuoco said.
"Inevitably, these kinds of functions and features are going to be one of the more compelling services offered through these b-to-b exchanges," he said.