DC Velocity - December 2017

decision-making on all sides, he added.

The service was announced Oct. 27 in partnership with DAT Solutions LLC, a load-board provider that will provide pricing data across several high-density markets to form the basis for buy-and-sell decisions, and Nodal Exchange LLC, a derivatives exchange that clears trades and settles accounts in the electric power and natural gas industries.

HOW IT WORKS

The model works like this: Say a shipper has a contract rate of $1.25 a mile, but it needs additional capacity and is concerned spot rates to secure more tractor-trailers could climb to $1.50 a mile over the next six months. The shipper buys a futures contract to hedge its position. Should spot rates subsequently trade at the higher price, the shipper sells out at a profit and neutralizes its margin shrinkage due to the upward price spike.

Conversely, a carrier contracted to haul at $1.50 per mile but concerned spot rates could decline six months out could sell futures to lock in the higher price and reduce its downside risk.

Of course, the shipper and carrier could lose if they bet wrong.

TransRisk makes its money on commissions collected from each transaction. Contracts will have durations of no more than a year. TransRisk will not book loads or manage trucks, and no physical delivery of a product will take place—a departure from other futures markets where a contract’s holder takes delivery of the underlying commodity should the contract expire.

The platform will initially support just the dry van segment, the most commonly used trailer type. However, Fuller said he plans to expand the portfolio at some point to incorporate flatbed, refrigerated, and dry bulk truck transport. Cloud-based technology will underpin the trading activity, meaning participants need not invest in IT (information technology) capabilities, he added.

Trading in transport futures is not a new concept. In 2001, the International Maritime Exchange, an Oslo, Norway-based exchange for trading forward freight agreements, began trading tanker freight futures contracts. The next year, the exchange began trading dry cargo futures. Fuller said the market for spot truckload futures is potentially much larger than for maritime futures.

ALL IN THE TIMING

Fuller will launch his model amid an increasingly volatile climate for spot rates. A growing shortage of commercial truck drivers, the Dec. 18 deadline for electronic logging device (ELD) compliance, and a firming tone to overall freight demand will result in a considerable tightening in truckload capacity in 2018 and perhaps beyond, according to various experts. In an interview, Fuller said that a risk management tool like TransRisk couldn’t come along at a more opportune time.

Spot rates this year have already put the hurt on shippers and brokers. The second quarter saw a sharp break between rising spot rates and flattish contract prices that squeezed brokers’ margins. It didn’t get easier for users in the third quarter as spot rates hit multiyear highs. Large blocks of capacity moved south to support the recovery efforts after hurricanes Harvey and Irma, and an improving U.S. economy and strong harvests in several regions left shippers with a lot of loads but not enough trucks.

Truckload demand hit seven-year highs in September, with van demand seeing unusual strength, according to DAT data.

Fuller said the biggest risk to the model’s success is that orders would be so large that counterparties—those on the other side of the trade—wouldn’t have the liquidity to match them.

Fuller estimates his market will require $50 million in monthly volume in order to function in an orderly fashion. The need for significant capital means the platform will be dominated by companies with big loads and capacity at stake, according to Fuller. Smaller players like owner-operators and micro fleets need not apply because the cost wouldn’t outweigh the benefits, he said.

TransRisk’s fee is equal to 0.5 percent of the size of the contract, which Fuller contends is a small price for large players to pay for the chance to limit their exposure to spot market turbulence. Fuller said the platform works for participants expecting wide up or down movements in spot rates, not marginal ones. “It’s not that people think prices are going up or not, it’s the degree to which they do so that they are trying to [hedge against],” he said.

One broker who thinks TransRisk will attract and retain ample capital is Douglas Waggoner, chief executive officer of Chicago-based Echo Global Logistics Inc., one of the country’s largest brokers. Speaking in October at an industry conference in Chicago, Waggoner called the concept “a valid approach” to delivering adequate price discovery and said TransRisk should find “plenty of speculators who will provide liquidity.”