Commodities Portal Shines Light Into OTC Derivatives Darkness
With the government pressing for more transparency into OTC derivatives, it was interesting to learn that OTC energy markets are also fragmented and that participants are hunting for information in the dark.Even though commodity futures and options trade on exchanges (i.e., CME Nymex, InterContinental Exchange and Dubai Mercantile Exchange), this is a global market and information is not necessarily available in a central place.
"The public needs better information to make trading decisions," said Vince Lanci, cofounder of FMX Connect, a start-up commodity portal for OTC brokers, traders, commercial companies and the retail public, that is aggregating content for listed futures and OTC options. Lanci visited Advanced Trading's offices this week to discuss the new online information community he is building.
"We're aggregating data from disparate places. We're adding value to it and we're also putting out some proprietary information as well," said Lanci FMX Connect - which stands for Financial Media Exchange - provides data, news, analytics, government reports, and independent third-party research on a party-neutral platform.
A former trader with 18 years experience on the major commodity exchange floors, Lanci's private equity firm Echobay Partners, Ltd. is backing the new venture. Lanci hooked up with Bill Mountford, a technology guru from his exchange days, who put together a risk platform for monitoring Lanci's own portfolio risk when Lanci was trading on the Nymex floor. "I know what professional traders want to consume and he wants to model it," says Lanci. The third co-founder is Samuel Thompson, who serves as FMX Connect's chief information officer.
The need for transparency is most acute in OTC energy derivatives, according to Lanci. OTC energy derivatives are traded bilaterally through dealers. The majority of the OTC energy industry trades via IM (instant messaging), like Yahoo, AOL and MSN. OTC energy derivatives are settled with ISDA (International Swap Dealers Association) agreements. To resolve the credit risk issue, in the wake of the Enron crisis, Nymex created Clearport, a credit facility for clearing bilateral contracts. If the order is traded off-exchange, it is submitted to the clearinghouse. The OTC energy market grew as a result of that. While Clearport solved the credit problem, "What you didn't solve is transparency," said Lanci.
For this reason, Lanci sees an opportunity to put the information all into one spot. "The first user is the OTC broker. He's in a room with the windows painted black," says Lanci. The OTC broker uses the information to become an infomediary to his clients - the hedge funds and the commercial users of oil that need data during the day, such as mom-and-pop home heating oil suppliers. Information is also fragmented for the customers, who have many-to-many relationships with brokers. A broker can set up a blog today and any customer in the world can go to that Web site, said Lanci. But there is no one central location for content to be delivered where I see A,B, and C, and not D,E and F," he said.
Even though the site is in beta form and was announced on June 17, the content is quite robust. In addition to real-time news from sources like CNN and Platts,(for subscribers) it offers end of day market reports including options volatilities, and intraday market snapshots for Blackberry users. Independent research contributors include: Peter Beutel of trading advisory firm Cameron Hanover; Equity Research Desk for exchange volumes and analysis and Dubai Gold & Commodities Exchange for weekly data and analysis.
The site is getting hits from big futures brokers, capital markets firms and the public. In terms of the data that people consume Lanci says there is high interest in settlements and open interest volume. "We're the only site that aggregates settlement volume and open interest of OTC options in an easy to read format," he said.
Lanci says the strategy is to aim upstream at the OTC derivatives dealers and brokers/traders and then downstream to the retail public. Volatility information is very important for volatility options traders, both co-founders stressed. "These are things you won't see on the CNBC ticker," said Lanci. For example, Nymex produces a report on open interest of 138 of their products, in a nice to read PDF format, said Mountford. "It's a huge file; it comes a day-and-a-half after the trading day," he noted.
Adds Lanci: "If you're an OTC broker in energy, it's very important to know what traded yesterday. "There's no ticker or tape in OTC trading. The bottom-line is that this new commodities portal aims to be a neutral place where the community of OTC brokers, traders, as well as commercial customers, hedge funds and investors can meet. "At the government level, officials are calling for transparency, so the banks can price their portfolios and so the public won't get ripped off," says Lanci.With the government pressing for more transparency into OTC derivatives, how could it be that energy participants are still hunting for information in the dark? Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio