Trading Desk: Brokers Regroup after Traders Call it Quits

Posted: 03/2002

TRADING DESK

Brokers Regroup after
Traders Call it Quits

By Josh Long

Brokers that were handling the lion’s share of firm bandwidth contracts last year are at a crossroads since market maker Enron Corp. and the small entourage of energy companies striving to create a liquid broadband market have called it quits.

In recent interviews, brokers, that had hoped raw bandwidth would be a commodity by now, say they will continue to match buyers with sellers and offer telecommunications providers risk-management consulting. But they underscore business has slowed since a handful of energy merchants ceased trading circuits using a standard bandwidth trading organization (BTO) contract for delivery at common pooling points last fall.

New York-based TFS Telecom handled a majority of transactions among the energy merchants, says director Ron Banaszek. Responding to the market changes, TFS Telecom will seek to broker deals involving big pipes such as optical circuits. But “there is not enough demand in that market right now,” he said during an early January interview.

Among reasons for decreased demand, the price of optical circuits has fallen to the point that buyers can purchase huge chunks of capacity on the cheap.

As a consultant, brokers may offer pricing information on market products and help companies implement risk-management strategies.

“Even though there might not be active trading the need for risk management and network optimization still exists,” says Jerry Samuels, senior vice president of brokerage operations at RateXchange Corp.

Still, Banaszek agrees telecommunications providers are more concerned about reaching short-term milestones than risk management, a longer-term commitment that some traders say cuts into every aspect of a business.

Amerex Bandwidth Ltd., a division of Amerex Energy, generated a majority of its business through the energy merchants. The Houston-based brokerage firm also is working with traditional telecom companies to put together deals, a long process that can take “hours and days instead of minutes,” says Amerex Bandwidth director Michael Moore.

One positive note: He says the traditional carriers pay the broker a significantly higher commission than had energy merchants — between 5 percent and 10 percent rather than 1 percent to 2 percent.

“We are not doing nearly as many transactions but we have a lot less people to” support, says Moore. “This is where we were 21/2 years ago when we got in.”

Some brokers had minimal dealings with the likes of Enron. Bandwidth Market Ltd. based in Denver, conducted little business with the energy merchants trading forward contracts, says president Howard Holme.

“We concentrate on deals for actual delivery of the bandwidth. Enron didn’t do nearly as many bandwidth deals leading to delivery as deals attempting to build the market,” Holme explained in an

e-mail interview in January. “Because Enron’s bandwidth trading initiative was not successful, nor doing many deals for delivery, the impact on Bandwidth Market will not be huge there either.”

Cantor Telecom brokers also say the end of bandwidth trading has not slowed the firm’s volume of business seriously, because the company has focused on brokering structured assets, such as the sale of dark fiber, conduit and optical circuits. The company also is a risk-management consultant and acts as a broker for corporate transactions, such as the sale of a business.

“Our business model has really focused on structured-asset transactions, corporate transaction and consulting,” says Cantor Telecom managing director Brent Wilkens.

That is not to say Cantor Telecom did not have personnel dedicated to bandwidth trading. Tom Mahon and Edward Murphy were responsible for running the bandwidth desk in New York, where they brokered deals among the energy merchants and spearheaded risk-management operations. But the two men and hundreds of their colleagues at parent company Cantor Fitzgerald lost their lives Sept. 11, at One World Trade Center.

Even so, brokers believe they can help carriers find a way to buy and sell bandwidth in a more efficient way. “Right now there are still brokerage deals to be had,” RateXchange’s Samuels says. “We have major carriers calling us every day looking for buyers and if an exchange or broker is able to aggregate buyers then certainly we will be able to put deals together for a commission.”

The problem is, brokers explain, buyers are a lot harder to find these days than the sellers.