Trading Desk: Trading Post

Posted: 02/2001

Trading Post

What can exchanges do to prevent looping?

The key to preventing carrier looping is maintaining a global presence and creating liquidity. Looping refers to a phone call where the transmission path traverses an ocean or continent in order to be switched and returned to the same city. Looping is generally viewed as negative because it uses additional facilities and creates transmission latency. Looping can occur because carriers are unwilling to interconnect in more than one location or because carriers are unwilling to invest in global switching facilities. Global exchanges provide switching facilities on different continents as well as multiple carrier interconnections.

In a liquid market, exchanges with a global presence can eliminate looping with the help of simple economics. In a liquid market, carriers will utilize the non-looped routes because the cost will be lower. Exchanges provide local interconnections needed to make this happen.

Q: Are exchanges able to guarantee payment?

A: Payment guarantees have become a great concern in a time when many buyers are paying bills late or not paying them at all. Facilities-based exchanges with integrated billing and banking systems provide a solution. This solution involves moving money from the buyer's account to the seller's account as the calls are being completed. The system is similar to a prepaid calling platform, except it operates at a wholesale level and uses an "escrow" account instead of a prepaid account. If the buyer's escrow account runs out of money, then the system will prevent additional calls from completing.

Q: Do any contracts offer price guarantees?

A: The BTO (Bandwidth Trading Organization) has created a master agreement that includes penalty clauses if sellers do not deliver. Today, most company contracts do not provide guarantees because the cost of insuring the agreed upon price exceeds what buyers are willing to pay for that guarantee.

Q: Would you rather sell to somebody who can't pay for it or buy from somebody who can't deliver?

A: Obviously, you do not want to be in either of these situations, but the question raises some interesting issues.

Today's switched-minutes marketplace is generally controlled by the buyers. These buyers demand quality and pay for services after they are delivered. Therefore, contracts do not include prepayment and allow buyers to stop sending traffic at any time. Because buyers do not guarantee minutes, sellers are not willing to make quality guarantees. So, to answer the question, switch minutes contracts would rather sell to somebody who cannot pay than buy from somebody who cannot deliver.

Today's bandwidth marketplace presents a level playing field between buyers and sellers. Bandwidth products are paid one month in advance and involve QoS service standards. Thus, bandwidth contracts provide limited protection against both problems.

Q: To this point, have bandwidth exchanges or minutes exchanges been more successful?

A: Thus far, the minutes exchanges have completed more trades, but the bandwidth traders have generated more revenue. The disparity occurs because the bandwidth model involves reselling as opposed to trading. This difference is described in the following example.

Assume a Trading Company brokers a trade between A and B. The price that A pays to B is $100. The Trading Company receives $5 from A and B as a commission. As a bandwidth trade, the Trading Company might report the transaction as $110 in revenue and $100 as the cost of goods sold. As a minutes trade, the Trading Company would report the transaction as $10 in revenue.

Apart from financial differences, minutes exchanges have been able to complete trades more quickly than bandwidth exchanges.

This month's Trading Post was written by Doug Johnson, vice president of marketing for The Global TeleExchange Inc. (The GTX, www.thegtx.com), a facilities-based service provider.