A long-awaited initiative was unveiled today to establish the first futures market to trade non-contract, or "spot," truckload rates.
The trading platform was developed by TransRisk, a Chattanooga-based company formed by Craig Fuller, the third generation of the family that founded U.S. Xpress Enterprises Inc., one of the country's largest privately held truckload carriers. TransRisk will work with Nodal Exchange LLC, a futures clearinghouse that will clear trades and settle accounts; Nodal supports trading activities primarily in the electricity and natural gas sectors. TransRisk will also partner with DAT Solutions LLC, a spot market load board provider that will supply major market pricing data to form the basis for participants' buy and sell decisions. It is expected to go live in late 2018.
The platform is designed to help participants better manage risk in the volatile spot market, which accounts for about 30 percent of business in the $700-billion-a-year truckload industry, and where prices on major traffic lanes can swing wildly from week to week due to multiple factors. Spot market prices have risen all year due to stronger freight demand, concerns about a shortage of qualified truck drivers, worries that compliance with a federal mandate to equip virtually all vehicles with electronic logging devices (ELDs) will reduce fleet productivity by as much as 10 percent, and the impact in the third quarter of hurricanes Harvey and Irma on truck capacity outside of the markets affected by the back-to-back storms. Spot market demand hit seven-year highs in September, according to DAT data.
Through the TransRisk platform, the market would set spot prices for truckload movements. A shipper with a contract rate of $1.25 a mile but needing future capacity might buy a futures contract to protect its margins should rates rise to $1.50 a mile several months out. Conversely, a carrier concerned spot rates could decline may sell a futures contract to lock in current prices and shield itself from a possible downward move in rates.
Contracts will have a maximum duration of one year. TransRisk will not book loads or manage trucks, nor deliver cargo. TransRisk will charge a 0.5-percent commission on each transaction. The platform will be used initially to trade dry van prices, though Fuller hopes to expand it to cover flatbed, refrigerated, and dry bulk transport rates. Cloud-based information systems will support the platform, he added.
Freight brokers, carriers, and shippers "are exposed to market conditions without viable hedging alternatives to manage price risk," the companies said in a joint statement. "These new contracts will provide participants much needed risk management tools to hedge their freight lane exposure."
In an interview with DC Velocity prior to today's announcement, Fuller said the objective is to introduce honest dealing into a "liar's poker" atmosphere in which bidding, bluffing, and chicanery are intertwined in a zero-sum game, where one side gains at the expense of the other. By being allowed to weigh the magnitude of price movements and to buy and sell contracts on those hunches, shippers, brokers, and carriers "could be much more honest about their demand and capacity," Fuller said. This leads to greater integrity and transparency, which will spawn better decision making on all sides, he added.
Fuller said the platform was not built to support the daily load-matching activities of transactional brokers. Rather, it is for third party logistics providers (3PLs) that have deeper, long-term relationships with shippers but also have meaningful hedging needs.
The truckload industry is one of the biggest businesses in the U.S. without an underlying futures market.