Liquidity-the elixir of e-market conquerors

By Roxane Richter, Contributing Editor

As the pitiable caterwaul of “e-mania” fades, many energy e-market makers, vendors and digital marketplaces have been singing to the tunes of: “What if I threw an auction and nobody came?” and “It’s my e-marketplace and I’ll cry if I want to.”

Well, truth be told, not everyone in the digital energy marketplace is starving, going bankrupt or selling off their profitable software divisions. In fact, Intercontinental-Exchange Inc. (ICE) and International Petroleum Exchange Ltd. (IPE), the ICE-owned energy futures market, recently reported record volumes at the close of Q1 2002. Transaction volume for the quarter at ICE increased 979 percent, or nearly 10 times, when compared to the first quarter of 2001, with the notional value of transactions increasing by 499 percent, or nearly five times. Total market growth at IPE increased by 16 percent over the first quarter of 2001, with significant transaction volume growth occurring in Brent Crude and Gas Oil futures.

Fast on the heels of that announcement came the news in April that eSpeed Inc., a subsidiary of Cantor Fitzgerald, had entered into a long-term licensing agreement with ICE, granting use of eSpeed’s “Wagner Patent” to ICE and its majority owned and controlled affiliates. (The Wagner Patent deals with automated futures trading systems in which transactions are completed by a computerized matching of bids and offers of futures contracts on an electronic platform.)

Market variables: Direction, momentum, volatility & liquidity

According to Market Skill Builder, a technical trading simulation software firm, there are four main variables at play in markets like energy:

  • Direction: During any given time frame, a market can do one of three things: go up, go down and move sideways. Persistent moves in the same direction are generally referred to as “trends”;
  • Momentum: Up and down moves can be fast (“impulsive”) or slow (“corrective” or “drifting”) in nature (or in between). The most important aspect of “momentum” is not any absolute measurement of its value, but whether it is constant or changing. The key questions are: Is the current price-move speeding up or slowing down, and is the current price-move faster or slower than the immediately preceding move in the opposite direction?;
  • Volatility: Can be low (almost no price swings away from and back to the underlying trend); high (wide and erratic price-swings in both directions), or anywhere in between. Changes in volatility often signal changes in trend, in the form of either a sharp move against the direction of the current trend or a reduction in activity and size of short-term price swings;
  • Liquidity: Can be high (many trans-actions being carried out on a continuous basis); or low (only intermittent price-quote updates and transactions). In general terms, technical trading is best suited to highly liquid markets as effective transaction costs (bid-offer spreads and commissions) are lower, and large orders can be placed without adversely affecting the market.

But liquidity-a high level of trading; the ability or ease with which assets can be converted into cash-remains key to market outreach. The creation of an information-rich environment helps to drive transactions (i.e. liquidity), allowing buyers and sellers to make speedy and accurate market decisions.

In the end, technology, market information, heavy-hitting market makers (and market-making services) and a structured and fair trading environment all serve to increase the liquid flow of transactions. And even though liquidity and technology have not been overlooked in U.S. e-markets, Europeans are currently struggling with unprofitability due to non-collaborative data exchange and low transaction volume (liquidity)-even though billions have been tossed into the European e-marketplace kitty.

Data or dust

In March of this year, Forrester Research reported that Europe’s 25 leading e-marketplaces generated just $350 million in revenue during 2001.

Not an astounding or unfathomable figure, to be sure. But what is absolutely astounding-downright unbelievable, actually-is that the same marketplaces received a walloping $2 billion in funding from industry backers and venture capitalists.

And that proves that even fully funded e-marketplaces don’t succeed unless they deliver on one-to-all and all-to-one data exchange, according to Forrester. “Europe’s e-marketplaces stumbled due to boardroom conflicts, integration hurdles, and unprofitable business models,” said Forrester analyst David Metcalfe. “Of the 25 e-marketplaces we spoke with, a whopping 88 percent are unprofitable, and only 36 percent of these unprofitable e-marketplaces expect to reach break-even during 2002. Equally, we surveyed 30 large European firms and found that e-marketplace usage [liquidity] remains low. During 2001, only six percent of our respondents purchased more than five percent of their direct materials through a Net market, and a whopping 80 percent majority sold less than one percent of goods through an exchange.”

“The expectation that e-marketplaces would redefine market structures overnight did not come to fruition.

So, to drive revenues from these pains, e-marketplaces need to position themselves in 2003 to zero in on outsourcing opportunities and convert shared technology into shared processes.

Richter is a veteran energy journalist specializing in new technologies, deregulation, risk management and energy marketing. She can be reached at

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