Trading Desk - What Exactly is Bandwidth Trading? And Who Are the Players?

Posted: 03/2001

Trading Desk

What Exactly is Bandwidth Trading? And Who
Are the Players?

Bandwidth Trading is essentially a component of risk management. But not all
companies will choose to trade bandwidth for the same reasons.

Telecommunications companies initially look to selling bandwidth where they
have assets, or to buy bandwidth to either augment their network or to meet
short-term needs while they wait for their networks to turn up.

Telecom companies like Global Crossing Ltd. (www.globalcrossing.com),
Teleglobe Inc. (www.teleglobe.com) and
Broadwing Inc. (www.broadwing.com) have
made it clear that they have groups dedicated to trading bandwidth.

Energy merchants and utilities (E&Us) are companies such as Enron Corp. (www.enron.com),
which created Enron Broadband Services (www.enron.net),
or El Paso Energy Corp. (www.epenergy.com),
which started El Paso Global Network, that have trading expertise. They obtained
the trading skills in other commoditized markets, e.g., gas and power.

Trading commodities is a practice the E&Us have refined, in some cases
for more than two decades.

This may give them an edge, and trading bandwidth and potential derivative
products–swaps, options and futures–is simply a natural progression for them.

Financial institutions such as Morgan Stanley Dean Witter & Co. (www.msdw.com),
Salomon Smith Barney Inc. (www.smithbarney.com)
and Goldman Sachs & Co. (www.gs.com) also
may participate in bandwidth trading, but they primarily focus on the large
"block" bandwidth transactions and derivative products.

Q: What are the different trading systems?

A: There are no simple answers regarding the different trading
systems. Some are easy to recognize.

To start, trading systems are either neutral or not. A neutral exchange means
members can buy and/or sell bandwidth by posting it themselves. The exchange
operator does not actually buy or sell bandwidth, so it is not in competition
with the members.

Other exchanges are operated so that the system owner takes title of the
bandwidth.

It’s best to do your homework ahead of time, so you know exactly what kind of
trading system you are using.

Q: Is there a shortage of bandwidth buyers in the market?

A: No. The buyers and sellers are the same companies as before. They
are carriers, ISPs, ASPs and other network service providers who are looking to
grow their businesses by executing their business plans.

But in a market where bandwidth prices are declining month-to-month,
sometimes by 30 percent or more, buyers are not willing to pay premium prices by
signing 12-month contracts.

Face it–in a declining market, the "premium" rate for signing a
12-month contract may not look like such a great deal after a month or two.

So yes, the buyers are there.

The 30 or so companies that own most of the key infrastructure only recently
have begun to competitively price their bandwidth in 30- to 90-day increments.

This is good news to buyers and sellers, as elasticity of bandwidth becomes
more evident.

Q: What is the most important thing I can do to get started?

A: First, understand that bandwidth already is being traded, so get
started.

Second, do your research. Companies that are trading bandwidth have a vast
amount of free information, such as white papers, on their websites for you to
review.

Third, don’t let the market form around you, leaving you out.

Answers to this month’s Trading Post column were provided by RateXchange
Corp. (www.ratexchange.com).
RateXchange provides trading, consulting and information services, so that
market participants can maximize their telecommunications assets. The services
give network providers, energy merchants and financial institutions using the
RateXchange Trading System (RTS) a chance to trade fiber-optic, Internet and
satellite bandwidth. RateXchange also offers a consulting practice that provides
commodities management, risk minimization strategies and private label
exchanges, and an information services group that provides market research,
analytical tools and comprehensive industry background.