How can ferroalloys market benefit from ideas successfully implemented in telecom industry?
Alloys and some metals, including ferrochrome have many varieties to consider during market negotiations. Different grades and subgrades, puzzling indexes and definitions make price discovery challenging. Recent electricity cost volatility and CO2 footprint management objectives added more parameters. Complexity of the market makes long-term sustainable business development difficult. Uniform standardization can blur the individual advantage or decrease liquidity due to the variety of the product specifications, thus requiring extension of the classic exchange mechanism.
Interesting that, similar challenge has been resolved successfully in telecommunication industry that stands far away from metals.
Ferrochrome and radio spectrum are two commodities that share some remarkable similarities. They both do not lend themselves to standardisation, and substitution effects are only partial. Similarly, where Ferrochrome is a key ingredient in the production of stainless and special steel, Spectrum is also a crucial component in telecommunications. Without it, the communication infrastructure that we all rely on every day would not exist.
Inspired by Nobel Laureate Paul Milgrom’s auction theory, SoftMetal is a modern adaptation of a continuous auction system coupled with the use of trustful technology.
Platform is designed for trading of ferrochrome and many other complex metals by combining contemporary science and new technology for the sustainable development of multi-element alloy trading. With its launch just around the corner, we will contextually explain in a string of articles the architectural background behind this unique game changing market price discovery platform over the coming weeks.
In the meanwhile, below is an example how similar innovation in radio spectrum auctions system was successfully designed and implemented.
The greatest auction ever
People don’t necessarily remember the 90’s as the age of European advances in mobile telephony, but it’s true. Europeans were much more advanced in mobile telephony than the US, and access to technology was a big part of this advantage. Standardisation in the telecommunications industry around GSM was another key element. However, there was also another reason that went largely untold, relating to better allocation of the radio spectrum for telco companies.
A quick background on radio spectrum. It is a finite good that is non-renewable, and as such, has been a public good distributed by states or local authorities. Originally, radio spectrum was allocated through hearings facing political representation, both in Europe and the US. Relatively centralised and high-touch states in Europe facilitated this allocation, whereas the multiple levels of jurisdiction, and the low-touch attitude to the economy in the US complicated the assignment.
With mobile telephony on the rise in the late 80’s, the appetite for radio spectrum grew vastly. By the early 90’s, the process of granting spectrum through hearings became cluttered, and an overhaul in the attribution process was overdue. European countries favoured an approach where nationwide licenses for mobile telephony were attributed according to, the supposed best interest of the public. This heavy state-sponsored approach meant that radio spectrum was first attributed to national telco champions, and then to national tech champions, with lobbying power playing an important role.
In the US, and more broadly in the anglosphere, preferences for competition and free market economics led to favour an approach where local licenses were sold to local operators on a one-by-one basis, with a mixture of political hearings and local auctions for the radio spectrum. The underlying assumption was that although the process was probably known to be suboptimal, it would only be so by a haircut, because there would be a free, fair, and fluid ‘market economy’ for licenses afterwards. Eventually, radio spectrum license owners would trade their licenses with one another, leading to a balance, where coalitions and operators would rapidly emerge. To a true believer in free markets, this would sound like a reasonable assumption. In practice, the results were disappointing. Licenses were sold beneath their maximum value to individuals or companies, and lead to ‘license squatting’. License acquirers would purchase a license with speculative intentions, then sit on their licenses rather than put them to any use and they would wait for an opportunity to resell them for a large profit to a real operator. At the same time, telco operators with the intention to create local bells, or national mobile operators, struggled to acquire the licenses they needed and were threatened with being held to ransom by squatters.
It became clear at the conclusion of the trials in the early 90’s when mobile telephony was rapidly expanding, that state intervention and favouritism, for all its ills, can still outweigh broken market economics. The European process was badly tainted by favouritism, but it was still far better than the US/Anglo outcome.
What happened next made economic history. US Vice-President Al Gore announced that radio spectrum would be auctioned and ‘put in the hands of the people who value them the most’. He tasked the Commodity Futures Trading Commission (CFTC) with designing the process, who in turn gathered a group of auction theorists. They designed and implemented a ground-breaking auction system where price discovery was essentially guided by game theory and rolled out the spectrum auction in ‘94.
The New York Times called it “the greatest auction ever”. A phenomenal success, raising $7 bn USD – the largest public auction in the history of the US.
The ‘94 CFTC spectrum auction is a perfect illustration of the power of innovation in the face of politics and market economics. It functioned as intended because it was run by a reputable public institution, the CFTC itself. If these benefits are to be brought into the private sector, then trustful technology is the key to ensuring market integrity– which lies at the core of SoftMetal.
Read on to understand more about trustful technology and how it’s being used within SoftMetal.
Below is a sample of how the order book looks on the buy side, you can explore more by logging into demo version.