In any market, the price of a good, service, or security is a function of supply and demand. How this price is determined varies by where the transaction occurs and the relationship between the buyer and seller. For example, you can’t reasonably expect to negotiate with your supermarket over the price of the avocados you need to make guacamole tonight. You can bet, however, that the supermarket negotiated with their suppliers over the price and quantity and delivery date of those avocados.
The same comparison holds water in the financial markets. When you log into your online brokerage account, you have some limited order types but by and large, you’re just buying or selling stocks or securities at the level the market tells you to. At the institutional level, however, those transactions are often negotiated by brokers. Take the New York Stock Exchange, where buyers and sellers work through intermediaries known as specialists determine the equilibrium price of a given security. Specialists gather orders from both sides and seek to match buyers and sellers.
In market parlance, the difference between the price at which a buyer is willing to purchase a security and the price at which a seller is willing to sell that security is known as the bid-offer spread. A trade occurs when one party “crosses the spread” by paying an offer (in the case of a buyer) or giving a bid (for a seller). The only market where this nomenclature gets turned on its head is real estate, where the word “offer” seems to mean pretty much anything you need it to. For our purposes, forget what you know about real estate.
In liquid, calm markets, spreads are tight, and the economic cost to crossing them is not huge. For example, for essentially any stock in the S&P 500, a spread will rarely be wider than 5 cents. Buying 10 shares of Apple at $170.00 will cost you $0.50 more than at $169.95. However, when volatility increases, spreads widen and the cost of crossing them rises commensurately. There are few markets out there that are more volatile than ocean freight. Oil, gold, bitcoin; none of them touch it. (We’ve got the numbers to back it up. Email me if you want to chat more about it). You can imagine that in a volatile market, there is necessarily a lot of information exchanged between buyer and seller before someone crosses the spread.
At NYSHEX, our model is based on the fundamental principal that we are matching natural buyers and sellers of ocean freight. Shippers need to move their goods in containers, and carriers need to fill space on their vessels with those containers. The business to business nature of our users implies that there’s some room for negotiation in our transactions. This is amplified by the market’s volatile nature. Our goal is to enable these discussions between buyers and sellers with technology rather than intermediaries. To that end, we have released a tool known as the Binding Request.
With a Binding Request, shippers submit a request for a specific contract of carriage to carriers on the exchange. These requests are hyper specific in nature and binding. When the carrier sees the request, they can either accept it and form a binding contract with the shipper, or counter with slightly altered details. The shipper can accept the counter and form a binding contract or not, in which case no transaction occurs and the Binding Request is dissolved.
The tool allows for price discovery for both shippers and carriers in a market where extreme volatility means that spreads are often very wide. Team NYSHEX provided a demo to a few of our top members who then had the chance to try it out by entering a binding request. The feedback was especially positive with all members saying that submitting a binding request is now far faster, streamlined and easier.
“This helps to show that we are not just fishing for a rate but that we are serious.
It adds credibility and integrity to what we say – we want to buy x containers at this rate – without destroying rate levels.”
- Laura Fuller, Mills Brothers International
“The uncertainty is very difficult for us. Will the GRI in December stick or will it get pushed back to January?
Being able to use NYSHEX to cut the uncertainty is the benefit.”
– Carl Varner, Fornazor
“NYSHEX gives us the opportunity to go out further than a month or two.
The contracts I recently bought are 6 weeks out.”
– Christy Marron, Prairie Creek Grain