In 1969, Instinet founded the first ever electronic trading system. Though it only published bids and offers, it began a technological revolution that would lead to Globex and eventually to high frequency trading platforms capable of performing thousands of trades each minute from a mobile phone.
The drive towards electronic trading has enhanced transparency across many markets, leading to more effective price competition between buyers and sellers and eliminating the profit and loss from asymmetric access to market data.
The dry bulk market has now taken a tentative step towards this as Capesize Chartering — a pool of Capesize ships [LOCKED] belonging to Bocimar, CTM, Golden Union, Golden Ocean and Star Bulk — has launched an app that will provide a record of vessels fixed by the companies within the pool as well as other fixtures from other companies across the market.
The list will be updated live throughout the day — in contrast to the traditional lists that are only sent out by the Baltic Exchange and various shipbrokers once a day — and will let charterers and owners see up to the minute information on the last deal concluded and allow them to base their own deals on where the market stands. While existing daily lists provide a valuable picture of the market, the new Capesize Chartering app is intended to provide an additional data source independent of shipbrokers and the Baltic Exchange.
Participants hope that an increase in transparency in the market will keep freight rates fair, with neither charterers nor owners profiting from a counterparty’s lack of information.
Platforms like this struggle if some companies are reluctant to make their trades or fixtures public. But if the fixtures published on the app can give a realistic picture of the position of the market then it will increase transparency for all companies concluding confidential transactions. This will require fixtures to be published regularly across a variety of routes.
That could be a challenge on routes where participating shipowners typically do not operate and on routes that are not particularly liquid — it is difficult to base negotiations on a fixture that was concluded several weeks ago.
Are we witnessing a first step towards the electronic screen trading common in other financial markets, linking charterers to shipowners without requiring brokers? A widely used system would greatly enhance transparency in the market, as well as making transactions quicker and easier and negate the cost of broker commissions.
But such a system would suffer from several key flaws as can be seen from similar systems introduced for other commodities. Screen trading systems require extensive binding agreements and credit agreements with the various counterparties, creating a barrier to entry in a market with a large number of participants.
In commodity markets where screen trading has been introduced, voice brokers continue to play a key role and, in fact, a significant percentage of the spot trading is done off screen. In a market like dry bulk, where there is a huge range of variables for participants to take into account, brokers thrive on knowing which variables parties will be flexible on, which are most important, and what particular contract oddities are necessary for each deal.
The amount of tailoring required for each deal prohibits the use of screen trading, which would instead rely on standardisation or require incredibly complex algorithms to replicate telephone broking.
The traditional broker cannot plan for retirement quite yet. But with the Baltic looking set to sail into the sunset by way of a merger with the Singapore Exchanges and brokers unhappy at the way they are being treated in the process, some may be looking wistfully towards a pint and a pipe.