Article 6: Trucking Freight Futures - Off-Exchange Block Trade Market Making

Logistics Management and Lakefront Futures’ Trucking & Derivatives Group are currently publishing a series of articles on the “A-Z” of trucking freight futures.

This sixth article explains an effective approachfor promoting an off-exchange block trade position and securing optimal pricing and trade execution in the shortest period of time.

Previous articles in the series:

• Article 1: The Trucking Paradigm Shift & the New 3-Dimensional Market 
• Article 2: Trucking Freight Futures 101
• Article 3: Hedging Applications for Trucking Carriers, Shippers & 3PLs
• Article 4: Trucking Spot Market Vs. Freight Futures Market Pricing & Price Discovery
• Article 5: Trucking Freight Futures – Hedging Strategy, Position Sizing & Trade Execution

Trade Execution Avenues

Article 5 in our series of articles on trucking freight futures, focused on determining “Hedging Strategy, Position Sizing & Trade Execution.”  One of the discussion points in the article, explained the two (2) trade execution options on the Nodal Exchange: 1) On-Exchange and 2) Off-Exchange.  Off exchange trades are done “off” of the exchange’s trading platform and done as “block trades.” In most aspects, the terms “off-exchange trades” and “block trades” are synonymous.

For the next 6 months, Lakefront Future expects that a large percentage of the bidding/trading activity will occur off-exchange and therefore the on-exchange electronic bidding & trading activity is not indicative of the market’s interest in trucking freight futures. In an established futures market, like corn or soybeans, block trades are not required, as there is plenty of liquidity electronically.  Given that the trucking freight futures market is new – launched in March 2019 - the electronic liquidity is not yet there, which is the reason to do block trades. The trade is still cleared and guaranteed by the Nodal Exchange.  Off-exchange trades allow the market participant to negotiate directly with a counter party interested in taking the opposite side of the trade.

Making a market for a block trade

The objective when executing a block trade (s) on a desired position, is to secure the best pricing terms and execute the trade in the shortest time possible. In that regard, there is more to a successful block trade than just finding potentially interested counter parties. Set forth below is a step-by-step example of how a trucking carrier can make a market for its off-exchange trucking freight futures position and successfully execute a trade via Nodal Exchange.

ABC Trucking, a trucking carrier, is interested in hedging a portion of its corporate revenues at the end of the year from further decreases in trucking rates by taking a “short” position on 100 December 2019 National US Van futures contracts (fut.vnu201912) – 100,000 miles.

Step 1 – Open an account with an FCM and Nodal: Given that both counter parties in a trade have to be registered with Nodal Exchange and have a futures trading account through a Nodal FCM, it is in the best interest of ABC Trucking and the counter party to open an account as soon as possible as it will take a few weeks to complete.

The process includes: a) executing the Nodal participation agreement, b) establishing a relationship with an FCM that is a clearing member of the Nodal Exchange (there are 13 FCM clearing members) and c) being approved by Nodal. Nodal requires that only entities or individuals that have at least a $1 million net worth or $10 million in total assets can trade trucking freight futures (however, corporations with total assets of $5 million + can be approved based on having 1 other additional portfolio requirement).

Step 2 – Counter Party Procurement: The second step for ABC Trucking is to find a counter party that would provide the best pricing terms given their interest in the position. Being that ABC Trucking, as a “seller of trucking capacity”, is taking the short position in the fut.vnu201912 contract, the counter party would be a “buyer of trucking capacity” such as a shipper or 3PL wanting to hedge its’ trucking costs from the risk of rising trucking rates.

Instead of promoting the position to a large number of potential counter parties, ABC Trucking should already know which counter parties would have the most interest in the position or work through a trucking freight futures broker that has a deep base of counter parties interested in long positions on the National US Van futures contracts. If it is a large position, ABC Trucking’s futures broker might determine that the best execution will occur by breaking the large position into 2 or 3 smaller positions to offer a few counter parties.

Step 3 - Execution & Trade: One of the benefits of off-exchange block trades is that they would allow ABC Trucking, or its futures broker the ability to negotiate the contract price. While the ultimate contract price cannot vary significantly from the current on-exchange fut.vnu201912 contract prices, ABC Trucking or its futures broker might be able to negotiate a slightly higher rate with a motivated counter party that would improve the effectiveness of the hedged position for ABC Trucking.

Once a counter party is procured and the terms are negotiated, the trade should be executed via Nodal Exchange as soon as possible. In that regard, ABC Trucking or its futures broker would email the final terms and contract size to Nodal Exchange for trade execution. As mentioned above, all on-exchange and off-exchange trucking freight futures contracts are cleared and traded through Nodal.

Conclusion

Off-exchange block trades can be very beneficial to market participants especially given that at this time most of the activity will occur off-exchange. Given the emerging transparency of who the potential counter parties are for trucking freight futures positions, a market participant should work through a trucking freight futures specialist that can provide not only exposure to potential counter parties, but can secure the best pricing terms and trade execution for a participant’s position.

Logistics Management is launching a new section in both its weekly digital and monthly print publications to reflect the new 3-dimensional market – “Trucking & Freight Markets 360o”. This section will provide a comprehensive snapshot of the trucking spot, forward and freight futures markets along with the diesel/derivatives market. The content will be provided by Gary Saykaly who is the head of Lakefront Futures’ Trucking & Freight Derivatives Group which helps market participants hedge trucking rate and fuel cost risk – [email protected].

Past performance is not necessarily indicative of future results. The risks associated with trading futures and options are substantial. Futures and options trading are not suitable for all investors.