Q: What is the role of minutes exchanges in capacity trading?

Q: What is the role of minutes exchanges in capacity trading?

A: Most fundamentally, a minutes “exchange” is not a true exchange where commodities traders meet to trade standard futures contracts. Minutes exchanges are actually physical delivery marketplaces for telephone minutes. It is more accurate then to refer to them as “minutes marketplaces.” Ultimately, all trades that occur in a minutes marketplace result in the physical passing of traffic from the buyer to the seller of the minutes. Unlike in a true exchange, minutes marketplaces do not involve standard futures contracts or cash settlement of deals. None of the minutes marketplaces in operation today are regulated by the Commodity Futures Trading Commission
(www.cftc.gov).

Q: If it’s not a true exchange, why is it often called an exchange?

A: It is no accident, however, that minutes marketplaces have a vocabulary and structure that evoke that of true commodities exchanges. Carriers treat voice minutes as interchangeable and trade them on a price-sensitive basis. Nevertheless, the quality of voice calls can vary substantially and unpredictably, and are difficult to precisely quantify. Furthermore, the delivery of the voice call depends on a network interconnection supporting specific standards where the standard can vary with the network provider, country, business needs and so on. These facts have kept telephone minutes from being commoditized in the form of a futures contract on a true exchange.

Q: What comprises a minutes marketplace?

A: Minutes marketplaces are composed of three elements: a trading system, a financial intermediary and a switch.

Q: What is the trading system?

A: The trading system is the deal-making engine of the minutes marketplaces, all of which use the Internet for this purpose. There are two types of web-based trading systems: static and real-time.

A static trading system will present the user with an HTML-based web page with orders and prices that are current at the time the page is first loaded. The user may reload the page to obtain an update or the page may be set to automatically reload on fixed time intervals.

A real-time system employs Java or an alternative-programming tool as a front end to provide a continuous feed to the user allowing them to receive bids, offers and trades as they occur. The most obvious benefit to a real-time system is that it gives the trader the chance to act on a potential deal a few minutes sooner, often a critical time advantage.

Q:What is the role of the financial intermediary?

A: The financial intermediary is of vital importance, since all minutes marketplaces shield buyer and seller from one another and act as principal in every trade. The financial intermediary is the fulcrum upon which balances the entire commercial relationship of the minutes marketplace. It expects to collect money from the buyers and pay money to the sellers at the agreed-upon settlement intervals. Timely payment must occur regardless of whether all collections have been received–if not, confidence in the system wanes and the marketplace collapses. Therefore, it is crucial for the financial intermediary to be on firm financial footing in order to promote confidence in its participants and encourage high-volume trading activity.

In the case where a minutes marketplace trades forward contracts for firm delivery of fixed blocks of telephone minutes, the intermediary takes on the additional roles of marking all positions to market and managing margin payments. The rules and systems for margining are taken from general commodity markets.

Q: What is the role of the switch?

A: The switch ties all marketplace participants together–literally. The type of switches used in minutes marketplaces ranges from small, programmable switches to large-scale systems. It gives the minutes marketplace the means to control and monitor the traffic through the marketplace and ensures that participants remain anonymous from one another.

Q: Who operates the minutes marketplace?

A: A true minutes marketplace should be operated by a neutral party, not a carrier. It should not maintain any of its own international circuits. In this sense, it does not compete with the carriers who are its customers. It further assures that all authorized buy and sell orders within the marketplace are treated equally regardless of which carrier is actually placing the order. A minutes marketplace also transacts minutes without markup, earning its income from transaction fees. In effect, the minute market reveals its margins to all participants, sacrificing potential profit to gain the confidence and traffic of its participants.

Q: What is the value of the minutes marketplace?

A: The true value of minutes marketplaces is proportional to the number of participants, a fact that was apparent to the initial carriers who led the way into this new arena. As others have followed, a critical mass has been established, and they are proving to be as efficient and advantageous to their members as the system’s architects originally envisioned.

The goal of a successful minutes marketplace is to bring efficiencies to the intercarrier market by standardizing and centralizing many of the front- and back-office functions that carriers presently support, allowing the carrier or reseller to focus on the revenue-generating aspects of his business. Billing, pricing and credit: The costs incurred by a carrier to deploy and maintain these systems cannot be added to the price of service–they merely consume overhead while adding no value. By centralizing these operations for the carriers, a minutes marketplace creates a more efficient marketplace.

Q: What are the potential benefits of participating in a minutes marketplace?

A: There are several possible benefits to carriers from participation in a minutes marketplace.

* Unbiased market view. Sitting at the epicenter of market activity, minutes marketplaces have an unfettered perspective of telecom trading activity. They compile and organize market data and present participants with a comprehensive, unbiased overview of market intelligence, enabling their members to make better-informed decisions.

* Shortened negotiation cycle. It is a goal of minutes marketplaces to move the wholesale telecom industry from fewer, long-term deals to many short-term deals.

* 24-hour online trading. Many minutes marketplaces allow participants to enter trade information at any time over the Internet. The market never closes–traders can search and act upon business opportunities at any time.

* Rapid provisioning. Many minutes marketplaces are able to put new trades into routing in a matter of minutes. This allows carriers to quickly take advantage of business opportunities in near-real time.

* Immediate and diverse supply. Connecting to a minutes marketplace gives a carrier or reseller instant visibility to the numerous participants already connected, tested and qualified by the minutes marketplace.

* Web-based management services. Most minutes marketplaces provide a full suite of web-based services as a value-added bonus to their participants. Billing data typically provided over the web includes net minutes bought and sold, average cost per route, outage time (if any) and fees. Information provided can be used for traffic management, quality analysis and control.

* Real-time market movement. For those minutes marketplaces with a real-time feed, resellers get true and accurate price and market data, which may assist them in intercarrier negotiation.

* Credit support. A minutes marketplace with a strong balance sheet or financial position adds value to the market by enhancing the credit of all participants. Bad debt is removed as a cost of doing business.

* Route standardization. Minutes marketplaces will distribute a standard definition of dialing plans that participants can use to augment their route definitions and keep up to date on the latest developments.

Answers to this month’s Trading Post column were provided by Eric L.
Raab, CEO of AIG Telecom (www.aigtelecom.com), operator of the AIGT Central Marketplace minutes exchange. AIGT is a subsidiary of American International Group Inc., a U.S.-based international insurance organization and the largest underwriter of commercial and industrial coverages in the United States. He can be reached at
[email protected].