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In my opinion, there is no market more exciting, dynamic and ultimately more volatile than the dry bulk futures market. It is a market that even at a time when freight rates are low, has the potential to deliver significant trading opportunities.
Of course, as we all know, this sector’s roots are firmly established in one of its founding institutions, The Baltic Exchange. This industry stalwart has long held a custodian role in the market, at a physical shipping level through to regulation and leading onto trading derivatives for risk management purposes.
However, for the dry bulk futures market to make the changes it needs to thrive, we need to more clearly define the role of The Baltic Exchange and its relationship to the physical market.
I firmly believe that the dry bulk shipping market needs to evolve and adapt to new challenges present in today’s trading environment. However, from my many conversations with brokers and traders, it seems to me that the primary emotion behind adopting change in this industry is founded on fear, and more specifically, fear of the unknown.
Today’s voice brokers are apprehensive about the growing presence of exchanges in a post-G20 market environment. They are also anxious about the perceived negative effect that this shift will cause for their role and the relationships that they have painstakingly built up over many years.
As a result, since the introduction of derivatives reform in 2009, we have seen that despite strong top-down change being dictated by regulators around the world, in reality, market participants are taking the smallest of steps to conform to these changes. Velocity is vital to market development and refers to the rate at which an object (or market!) changes its position. However, in order to ensure that this change is positive, today’s market requires the best of ‘old school’ thinking to intersect with the most innovative ‘new school’ thinking so as to embrace a new future for the industry.
Let’s be clear here, I’m referring to old school thinking as being the “lets hold on tight and protect what we have and know” approach, whereas new school thinking is all about adapting to that change and evolving processes and relationships to meet the new challenges.
Where this ultimately leads for me is to the conflicting roles of the well-respected Baltic Exchange and the impact that has on the market. On the one hand, a custodian of the maritime industry’s benchmark numbers, yet on the other, owner and operator of a futures market (Baltex).
This duality of roles must be considered in the context of providing positive support to the development and evolution of the dry bulk FFA futures market which is presently in danger of falling behind when compared to other dry bulk commodities markets.
It needs to reflect on what its core offering is and where it can collaborate globally to build the best of breed. It is institutions such as The Baltic which hold the key to successfully bridging the gap between this old world ‘protective’ thinking and new world ‘inclusive’ thinking.
The iron ore market is a prime example of how it is possible to bridge this gap. Remember that as a iron ore derivatives market, this didn’t exist until 2009 and ever since then it has unfailingly doubled in size each year. Why? Because iron ore has demonstrated much better rates of adoption and innovation in a very short period of time and as a consequence we’ve seen a greater velocity of liquidity develop.
The parallel here is how agile and well received the introduction of competition; modernisation and the use of hybrid trading (using voice broking and screens for price distribution) were received. If you compare 15-plus years of freight versus 5-plus years of iron ore, you will find a completely contrasting market experience.
Take the recent announcement by Dalian Commodity Exchange as an example of how quickly the iron ore market is evolving. Not only did it set a new all-time daily trade volume record, but also by opening up direct trading of iron ore futures to foreign investors, the largest trading arena for iron ore-based derivatives in the world has taken a huge step towards internationalising its contracts and driving the market forward.
To go one step further, at the top end of the scale the fuel oil market is utopia. It has fully embraced regulatory change – becoming entirely digital – and as a result it’s thriving, with a significant volume of liquidity, huge competition and viable roles for all participants.
There is a common theme here. Compare the iron ore and fuel oil market journeys to that of the dry bulk market and it becomes clear.
In both these illustrations, we have clarity of roles, independent index providers providing settlement data in innovative ways (physical spot platforms such as Global Ore, CBMX for Iron Ore and the Platts eWindow for Oil) and multiple futures markets, bringing brokers and traders together to build liquidity. Both fuel oil and iron ore have higher velocities and therefore a greater rate of adoption globally.
What is clear is that the ability for an industry to embrace change and deal with new rules and market design is absolutely key to its growth and the path forward.
The development of iron ore and fuel oil are excellent examples to show where greater adoption and greater velocity has generated liquidity, and it is these markets that should provide the template for dry bulk freight participants to use moving forward.
For me, the solution is clear. The Baltic Exchange should evolve Baltex or something similar into a freight physical ‘price platform’ and stop being a futures market.
By evolving its core business and being more aligned to its members in providing next generation, robust price collection and index services, it could deliver long-term clarity on its role for the next wave of the maritime industry.
This, in conjunction with working with the futures exchanges to advance adoption of derivatives is surely a uniting step. It embraces change, removes conflicts of interest and is essential in order to drive the velocity of adoption rates and set the dry bulk futures industry on a course for the fast lane.
Richard Baker is Chief Executive Officer and founding member of The Cleartrade Exchange (CLTX), He has led CLTX from formation based on regulatory opportunity to majority acquisition by the European Energy Exchange in late 2013 and has positioned the company as an end-to-end execution to clearing exchange.
